Pre-Holiday Profit-Taking Pressures Dollar

The U.S. Dollar finished lower against a basket of currencies under thin, pre-holiday trading conditions.

The U.S. Dollar finished lower against a basket of currencies under thin, pre-holiday trading conditions. Today’s weakness could have been worse had it not been for better than expected initial claims and durable goods. Both reports signaled an improving economy.

Although it is difficult to gauge the actual reasons behind the weakness, it’s easy to speculate that the huge run-up in the Dollar the past few weeks is making it ripe for profit-taking.

The most important thing that traders should take away from these markets this week is that sentiment is shifting away from risk-based decision making to more fundamentally driven decision making. The rally on Tuesday, Wednesday’s weakness and today’s action are prime examples. For example, traders drove up the Dollar on good existing home sales news on Tuesday while driving it lower on poor new home sales on Wednesday. Thursday’s reports helped stop a possible sharp decline.

Moving forward into the new year, it is important to note that volatility is likely to rise in the short-run as speculators and investors adjust to a new way to make trading decisions.

The EUR USD finished a little better. The chart pattern suggests a possible weekly reversal up. In addition, this currency pair could complete a 50% retracement to 1.4680 before new sellers step in. Debt issues in Greece, Spain and Portugal could rear up at anytime which could trigger fresh selling pressure.

Bearish pressure continued to push the GBP USD lower, but short-term traders should watch for a possible retracement before fresh selling pressure begins. The slow growth in the economy and the U.K. budget deficit remain the biggest reasons for the weakness.

Profit-taking after a huge run-up the past five days helped to pressure the USD JPY, but better than expected economic news limited losses. Attractive yields and improving economic conditions should continue to help the Dollar rise versus the Yen after the holiday. Look for bullish traders to re-enter the long side after prices retrace slightly. Upside momentum should then take this market to the October high at 92.32.

Overbought conditions and end-of-the-year profit-taking helped to pressure the USD CHF this week. Following a huge surge to 1.0507, this currency pair has now retraced back to the old main top at 1.0337. In addition, uptrending Gann angle support is underpinning the market at 1.0318. The technical bounce to the upside following a test of this level this morning proved its importance. A failure to hold this angle could trigger further weakness.

The USD CAD continued to erode support overnight but buyers came in when this currency pair hit the lower end of the retracement zone at 1.0459. A technical bounce could drive this market back to 1.0537 to 1.0598. Investors have been repositioning themselves in anticipation of an improving Canadian economy. Traders feel that an improving U.S. economy will help better the Canadian economy at a faster pace than previously estimated. After testing the upper-band of a wide trading range at 1.0601 on December 17th, this currency pair is now testing the lower end at 1.0459. The most important price to watch is 1.0405. Speculators have also been pricing in the possibility of an interest rate hike more sooner than expected.

Wednesday’s daily closing price reversal bottom in the AUD USD was confirmed by the overnight rally. This action is taking place on a major 50% price level at .8780. This type of pattern suggests a minimum 50% retracement back to .8964 is likely over the short-run. Thursday’s rally is likely profit-taking and position evening ahead of the new year. With risk sentiment changing, look for selling pressure to resume after the short-term retracement.

A similar situation is developing in the NZD USD. Traders are taking profits under thin trading conditions following a sharp sell-off. The pre-hawkish central bank bottom at .7043 was broken a few days ago, this action puts a bearish spin on the market, but selling pressure is not likely to resume until after the holidays. Look for a possible retracement to .7144 before the selling pressure resumes.