Get Ready For A Big Move In The Dollar
by Bogdan Giulvezan
The US Dollar rallied against its major counterparts since September, fueled by expectations that the Fed is set to begin tapering of the monetary stimulus sooner than initially expected, due to positive signs shown by the economy. Last week the Fed released the Minutes of the latest Meeting, which revealed that tapering is almost a certainty this year, but inflation and how to deal with it, remains a polarizing topic among policymakers.
Reducing monetary stimulus usually boosts the US Dollar because fewer asset purchases mean there are fewer dollars in the market, which makes the currency more valuable due to the supply-demand principle.
Strong U.S. Retail Sales data released last week (forecast change -0.2%; actual change 0.7%) boosted sentiment, which lowered demand for the safe-haven greenback and helped currencies like the Pound, Euro, and the Australian Dollar.
Key Events for the Week Ahead
Tuesday afternoon, several FOMC members will deliver speeches at various venues but the extent of the impact on the greenback is difficult to forecast; caution is advised. Wednesday is a slow day as far as economic releases are concerned but the action picks up Thursday with the Philly Fed Manufacturing Index scheduled at 12:30 pm GMT. The index acts as a leading indicator of economic health, derived from the opinions of manufacturers in the Philadelphia Federal Reserve district; the forecast is 24.3, a notable drop from the previous 30.7.
For the last day of the week, traders should keep an eye on a cluster of Purchasing Managers’ Indexes released on the Euro and US Dollar side. At 7:30 am GMT, the German Flash Manufacturing and Flash Services PMIs come out, followed at 1:45 pm GMT by the same indicators for the U.S. economy. These are all surveys of purchasing managers from the respective sectors and act as gauges of optimism and economic health. Higher numbers usually strengthen the currency but the impact is muted if the actual reading comes close to expectations.
Chart Analysis – EUR/USD
The pair is currently trading at 1.1590, just below the resistance at 1.1615. As we can see from the chart below, 1.1615 acted as an important barrier in the past, rejecting price several times, and this time the pair is showing rejection once again.
The previous two daily candles have long wicks and small bodies, which is a sign that the current level is still relevant for price action and that it may trigger a move south. If this is the case, we will likely see an encounter with the support at 1.1500, but a break above 1.1615 will probably result in a bullish move towards the 50 days Moving Average.