U.S. Dollar Recovers on Federal Reserve Uncertainty

The U.S. Dollar confirmed Friday’s closing pricereversal bottom with a follow-through rally overnight.

The U.S. Dollar confirmed Friday’s closing price reversalbottom with a follow-through rally overnight. The Greenback hit a 10-month lowagainst a basket of currencies on Friday, but rebounded after Federal ReserveChairman Ben Bernanke expressed uncertainty as to how much monetary easing theFed would allocate to its quantitative easing program.

Following an almost 5 percent decline in October afterinvestors increased bets the Fed would apply at least $1 trillion of newquantitative easing, traders pared bets on speculation the amount may not benearly that amount. The overnight trading action suggests that the market mayhave priced in too much QE into the market.

Adding uncertainty over the Fed’s next move along withshort-term oversold conditions, investors face the challenge to either takeprofits on short positions or put up with a possible choppy trade until thenext Federal Open Market Committee meeting on November 2 and 3.

Some traders are also questioning whether Bernanke has thevotes to implement a strong enough QE program although it’s been reported thatat least 2 Fed members are leaning toward supporting an aggressive QE program.

Bernanke said on Friday that he fears deflation more thaninflation. He also suggested that the Fed must do something to stay on courseto reach its mandate of 2% inflation. This can only be accomplished throughaggressively flooding the market with money.

So while there is a lull in the Dollar’s downtrend and apossible short squeeze taking place, many traders expect this current move inthe Dollar to be short-lived. Once the Fed restarts the money printing machine,the Greenback should resume its uptrend. This may mean a 2 week consolidationor short-covering rally until the Fed meeting.

The EUR USD closed below 1.40 for the week, taking the airout of some analyst forecasts for a move to 1.45. The outside move closingprice reversal top could also be indicative of the start of a substantialcorrection. Last night’s follow-through break confirmed the reversal top.

This week’s rally through the last swing top at 1.4028 toFriday’s high at 1.4159 appeared labored. At times it seemed traders weretentative about going long at such a lofty level. In addition, much of the moveseemed driven by a comment from the ECB’s Axel Weber calling for an end to thecentral bank’s asset buyback program rather than sound economic reasons.

Although the weakness started early in the U.S. session,Federal Reserve Chairman Ben Bernanke didn’t help matters much when he failedto clarify the Fed’s quantitative easing plan.

Bernanke gave a speech on Friday which failed to givetraders the clarity they needed to continue to pressure the Dollar. Some feelthat Bernanke may be lacking the consensus he needs to implement the QE programthat he feels is necessary to revive the economy.

Technically a break through the last swing bottom at 1.3775will turn the main trend down on the daily chart. The main trend indicatorturned long on September 1. Besides turning the main trend to down, a breakthrough this level may be setting up for a 50% correction of the 1.2587 to1.4159 range to 1.3373.

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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