Dollar Bulls Pinning Hopes on U.S. Economic Recovery

Today’s rally in the U.S. Dollar appears to be a sign that risk sentiment may not be the driving force behind price action much longer.

Today’s rally in the U.S. Dollar appears to be a sign that risk sentiment may not be the driving force behind price action much longer. The action today suggests that funds are being reallocated into the Dollar and stocks in an effort to capture a rise from the continuing improvement in the U.S. economy. The positive trade in both the stock and Dollar markets is a sign that investors are shifting back to watching traditional fundamentals for direction.

The EUR USD finished the day lower. The improving U.S. economy and lingering debt issues in Greece, Portugal and Spain are likely to continue to pressure the Euro. Longer-term charts indicate a move to 1.3800 is likely.

The British Pound closed down for the day. The chart indicates the next potential downside target is 1.5980. Traders are repositioning ahead of Tuesday’s Final Third Quarter GDP report. Economists’ are guessing an upward revision to -0.1% from an earlier guess of -0.3%. This figure will be a positive for the GBP USD and indicate that the U.K is getting ready to return to growth during the 4th quarter.

The USD JPY surged to the upside on Monday and is now building upside momentum for a test of the October top at 92.32. The only factor that could stop another leg higher tomorrow will be thin trading conditions because of the holiday trade. Declining demand for lower yielding assets is helping to boost the Dollar. Carry-trade action is also putting pressure on the currency as investors sell Japanese Yen to buy stocks.

For a while this morning, it looked as if oversold conditions would trigger a break in the USD CHF back to the old top at 1.0337. This pair turned around, however, shortly after the New York opening as precious metals broke in an asset allocation play. Traders should pay close attention to the gold market. Weaker gold prices will weaken the Swiss Franc.

The USD CAD closed lower as strong equity markets signaled the possibility of an economic recovery. Traders feel that a recovery in the U.S. markets will lead to an even stronger rally in the Canadian economy since this economy does not have to grow much to show strength. Lower gold and crude prices could limit gains in the Canadian Dollar. At this time, this pair is ping-ponging between a pair of 50% prices at 1.0598 and 1.0537.

The weakness in the AUD USD and NZD USD while U.S. stock markets rallied is a strong sign that traders are beginning to focus on traditional fundamentals rather than chasing higher yields.

Although U.S. equity markets traded better, demand for higher yielding assets fell as traders reassessed the Fed’s interest rate positions and the strong possibility of a U.S. recovery. Today’s lower currency markets suggest that risk sentiment may not be the driving force behind these markets anymore.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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