The U.S. Dollar Index erased all of yesterdayâ€™s loss
overnight and turned the main trend to up when it crossed a previous main top
at 76.82.Traders are increasing bets
this morning that the Fed will raise its key interest rate by at least a
quarter-percentage point from near zero by June.
Traders are basing their projections on the recent series of
good economic reports, namely the unemployment rate and retail sales.Expectations are for the Fed to revise the
language in its statement to represent a more hawkish outlook while revealing
signs of an earlier exit from low rates than previously estimated.Aggressive traders are already giving the
Dollar a boost based on this projection.
The key to sustaining the rally in the Dollar will be Fed
Chairman Bernanke.The question
investors are asking is â€świll he validate an early exit scenario?â€ťLately he has been downplaying the need for
higher interest rates because of his concerns about the sustainability of the
economic recovery.He doesnâ€™t want to
raise rates too early or too late.
Traders will be watching the Fedâ€™s statement tomorrow for a
hint of a rate hike.Market participants
will be disappointed if the Fed maintains its current dovish stance.In its November statement, Fed officials
pledged to keep rates near zero for â€śan extended periodâ€ť.They also specified that the current loose
monetary policy will stay unchanged as long as inflation expectations are
stable and unemployment fails to decline.Since this statement, the unemployment rate has declined from 10.2% to
10.0%.The drop in the unemployment rate
should be enough for the Fed to lighten up the tone in its December
Todayâ€™s producer prices report is expected to show an
advance.This news should be supportive
for the Greenback as it would force Dollar traders to readjust short positions
to readjust their positions and fuel more speculation that the Fed is getting
ready to begin a tight monetary policy campaign. Other reports which may
trigger the same response from traders include industrial production and the
NAHB Housing Report.
The EUR USD took a hard hit overnight following the release
of the German ZEW Economic Expectation Index report.The Euro fell to a two-month low versus the
Dollar when the ZEW report showed a decline from 51.1 in November to 50.4.Going into this report, Euro investors were
cautious about the economy because of credit downgrade concerns in Greece, Spain
and Portugal.Adding further to the weakness is a report that
nationalized a bank last night and may be facing a banking crisis.
Technically, the EUR USD is headed toward a major uptrending
Gann angle from the March low at 1.2456.This angle comes in at 1.4496 today.In addition, a minor .618 retracement level is at 1.4465.Breaking under these two levels will be
bearish for the long-run, but oversold short-term indicators could trigger a
technical bounce or short-covering rally.
Despite the weaker Euro and signs the Fed is getting ready
to hike interest rates, the GBP USD remains inside of a retracement zone at
1.6292 to 1.6154.Overnight news that
November CPI increased to 1.9% was largely ignored by traders since the
pre-report guess was for an increase of 1.8%.This currency is not likely to move until it breaks out of its
short-term trading range.
The increased outlook for a rate hike by the Fed is helping
to boost the USD JPY. Traders are becoming more confident that the Fed will
hike rates sooner than expected while the Bank of Japan is expected to keep
interest rates unchanged at 0.10% on December 17th.The increase in the spread between the two
interest rates is triggering a reversal in the carry-trade. Investors are
buying Dollars to payback loans while simultaneously borrowing Yen.
Yesterdayâ€™s news that that Abu Dhabi bailed out Dubai made
traders rethink their position about using the Yen as a safe refuge.Technically, the USD JPY held a test of a 50%
level at 88.58.The current formation
rally indicates that 89.46 is the next upside target.Taking out this level signals a further rally
Weaker Gold and the stronger Dollar are helping to trigger
an overnight rally in the USD CHF.This
market is now at its highest level since October.Look for the old top at 1.0337 to become new
Weaker gold and crude oil should put pressure on the
Canadian economy which is likely to lead to a strong rally in the USD CAD.This currency pair currently remains
rangebound with 1.0691 the upside objective and 1.0459 the downside support.
The AUD USD is feeling downside pressure overnight as
traders lowered to 66 percent from 80 percent the possibility of a Reserve Bank
rate increase at its next meeting on February 2nd.The RBA minutes from its last meeting
released last night, showed that arguments for a third rate increase are
â€śfinely balancedâ€ť.This change in member
attitude had the effect of â€śmaterially shifting the stance of policy to a less
accommodative setting.â€ťIn other words,
its time to take a pause in rate hikes. Technically, the Aussie rejected 50%
resistance at .9167.
The NZD USD is trading lower overnight.This market hasnâ€™t been able to attract any
buyers since the spike to the upside last week after the release of the hawkish
statement by the Reserve Bank of New Zealand.Itâ€™s beginning to look like the two day rally
was enough for investors to adjust their dovish positions.The chart indicates that .7180 to .7148 is a
potential downside target.
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