U.S. Dollar Finishes the Month Sharply Higher

The U.S. Dollar closed out the month of January sharply higher as aggressive buyers helped the Greenback surge to the upside following Friday morning’s better than expected U.S.

The U.S. Dollar closed out the month of January sharply higher as aggressive buyers helped the Greenback surge to the upside following Friday morning’s better than expected U.S. GDP report. The report which blew out forecasts encouraged traders to buy with both hands as investor sentiment turned more optimistic toward a strong U.S. economic recovery.

Earlier in the week, the Dollar was bolstered by a more upbeat statement by the Federal Reserve. Although the FOMC left interest rates unchanged, it did change its outlook on the economy from “weak growth” to “moderate growth”. The markets responded by driving up the Dollar in anticipation of higher interest rates and a much better outlook for the economy going forward.

Most of the time this week, the Dollar showed strength as investors became more optimistic about the U.S. economy, but demand for safety because of concerns over sovereign debt issues in Greece and Portugal also contributed greatly to the rally. These problems are likely to linger over into next week and until a viable solution is reached.

The EUR USD finished the month sharply lower and in a position to test 50% of last year’s July to November rally. The main range is 1.2329 to 1.5144 with retracement levels at 1.3800 to 1.3483. The combination of an improving U.S. economy and concerns over sovereign debt issues in Greece and Portugal pressured the Euro. Look for this down trend to continue until this market becomes oversold or until Greece and the European Union reach a solution on how to shore up the Greek budget.

The GBP USD closed slightly lower for the month. The lack of growth continues to plague the U.K. economy. On Friday, the Pound finished sharply lower following a robust U.S. GDP Report. The long-term chart indicates that this market may be vulnerable to a correction back to 1.5271. Watch for an acceleration to the down side to begin following a break down under 1.5706.

The USD JPY finished the week slightly better, but still lost ground for the month. Renewed strength in the U.S. economy helped the Dollar rise sharply over the Yen on Friday. For the month, this pair traded between two 50% levels at 93.13 and 89.30. A breakout over either one of these prices in February is likely to trigger a big move. At times, the USD JPY showed strength because of improvements in the U.S. economy. Other times, the Yen strengthened when investor sentiment shifted toward safety. Something is going to have to give soon. Either investors are going to sell the Yen hard as the economic outlook for the U.S. improves, or the Yen will rally sharply higher if traders turn more risk averse.

The USD CHF turned the main trend to up on the weekly chart, following a breakout over 1.0507. In addition, this market posted its second consecutive higher month and now appears to be on pace for a rally to 1.0942. Not only was the strengthening Dollar underpinning the market, but the weakening Euro versus the Swiss Franc also helped to trigger concerns that the Swiss National Bank was getting ready to intervene. One of the main concerns for the SNB is its appreciation versus the Euro. In this case, the sovereign debt issues in Greece and Portugal have helped weaken the Euro enough to make the Swiss France look strong.

The monthly USD CAD charted formed a closing price reversal bottom which indicates the possible start of a huge rally to the upside. This type of pattern usually suggests the formation of a major bottom. In addition, following the formation of this pattern the market rallies 50% of the last break over a 2 to 3 month period. This projects a possible move to 1.1633 by April. The stronger U.S. economy coupled with weaker crude oil and gold prices is not very supportive for the Canadian Dollar. In January, the Bank of Canada reiterated its stance against a stronger currency and vowed to take whatever action it deemed necessary to prevent a strong currency from derailing the economic recovery.

The AUD USD closed lower for the second consecutive month. A shift in fundamentals is starting to exert a bearish influence on this market. During January, China showed several signs that it was getting ready to tighten its monetary policy. This move is already pressuring demand for raw materials. A drop in demand from China will weaken Australian exports and could trigger the start of a sizeable correction back to .7706. On February 2nd, the Reserve Bank of Australia is expected to leave interest rates unchanged after two consecutive increases. Depending on the tone of the language in its official statement, the Aussie Dollar could be poised to move sharply lower to the down side.

The New Zealand Dollar closed lower for the month and in a position to drop further. A slow down in the New Zealand economy at the same time the U.S. is beginning to strengthen could put pressure on the Kiwi next month. The longer-term chart indicates plenty of room to the downside with .6263 a potential target. With the U.S. projected to raise interest rates later in the year and the Reserve Bank of New Zealand committed to holding rates low until the middle of the year, a tightening of the interest rate differential will favor the Dollar. Furthermore, less demand from China is likely to hurt the New Zealand economy.

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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