The U.S. Dollar Index finished higher on Friday while eking
out a small gain for the week, but the trading action during todayâ€™s session
indicates that it may be overbought. Following a strong overnight surge to the
upside following the Fedâ€™s discount rate hike late Thursday, the Dollar topped
early in the trading session then struggled to stay positive the rest of the
By mid-session it looked as if traders were shrugging off
the Fedâ€™s discount rate hike.Traders seemed
to be treating the action by the Fed as something the central bank had to do to
encourage banks to borrow from the private sector. At the start of Fridayâ€™s
trading session, investors reacted as if the Fed had begun to tighten its
monetary policy. This was not the case, however as the Fed reiterated its
position through the media that interest rates will not rise for an â€śextended
To recap the week, the Federal Reserve hiked the discount
rate 25 basis points to 75 basis points late Thursday, sending the U.S. Dollar
sharply higher. This buying spree spilled over into the overnight trade pushing
the Dollar Index closer to the all-important major 50% level at 82.63.
The discount rate hike by the Fed was implemented to
encourage banks to borrow more from the private sector. This move did not
reflect a change in monetary policy however despite market reactions and
analyst commentaries to the contrary.Some had interpreted the action by the Fed as a move towards
monetary-policy normalization although the Fed insisted this was not the case.
As far as the Fed is concerned, its official statement is that interest rates
will remain low for an â€śextended periodâ€ť.
What it could mean is that the Fed is comfortable enough to
begin hiking rates although it is not a change in monetary policy. In addition,
I think it sends a clear signal that the emergency supply of liquidity that
helped fund the economic recovery is over. It could also be interpreted as a
psychological move by the Fed for investors to get ready for the future course
of monetary policy.This action by the
Fed basically signaled that future rates are more likely to go up, rather than
stabilize or go down.
Some analysts called the move by the Fed a surprise.The timing may have been a surprise, but a
discount rate hike was mentioned twice by the Fed during the last two weeks. In
Bernankeâ€™s testimony to Congress on February 10th, he said the discount rate
would have to be raised â€śbefore longâ€ť.The FOMC minutes released on February 17th stated that a discount rate
hike â€śwould soon be appropriateâ€ť. As far as the timing is concerned, it looks
as if the Fed wanted to separate the hike from its normal FOMC activities in
order to emphasize that this hike was not a change in monetary policy.
Stock traders caught on quickly to what the Fed meant with
its discount rate hike. The strong rally in the equity markets helped drive up
demand for higher risk assets. The Dollar began its topping process early in
the trading session just after the EUR USD bottomed.The Greenback started to break as
profit-takers took over while the Euro turned positive.
The EUR USD posted a daily closing price reversal bottom.
This potentially bullish pattern could trigger the start of a near-term
short-covering rally if confirmed on Monday. The first short-term objective was
already reached at 1.3615, setting up a further rally to 1.3656.
A rally through 1.3656 could prove interesting. This will
mean that upside momentum is building which could trigger a further rally to the
last main top at 1.3788. A rally through this price will turn the main trend to
up and set up the possibility of a huge rally back to 1.4011.
This may sound improbable, but there are a record amount of
shorts in the market according to the CFTCâ€™s Commitment of Traders Report. If
some event happens that spooks the weaker shorts, then this scenario could take
place. Last week it was reported that China
had bought Euros so additional buying activity by these two nations could be
the catalyst needed to trigger a short-covering rally. Furthermore, an
injection of cash by the European Union or the International Monetary Fund into
will also drive shorts out of the Euro.
The GBP USD started the day sharply lower after a worse than
retail sales report. This report was another signal that the U.K. economy was falling further behind the U.S.
economy.If the Euro rallies, traders
may begin dumping on the British Pound. Oversold conditions could trigger a
mild short-covering rally next week before this market moves lower once again.
A rally in the Euro will help pressure the USD CHF. This is
because it is diminishing the chances of another round of intervention by the
Swiss National Bank. Fridayâ€™s closing price reversal top is a strong sign that
the selling is greater than the buying at current levels.
The hike in the discount rate by the Fed has caused Japan to lose
its short-term interest rate advantage against the U.S. Dollar. This has turned
the Japanese Yen into the main carry trade currency once again. The daily chart
indicates the USD JPY is overbought, but the weekly chart indicates more upside
The weakening Dollar triggered a turnaround in the crude oil
and gold markets on Friday. The subsequent rally in these two markets helped pressure
the USD CAD to its lowest level in 4 weeks.
Strong demand for equities and commodities helped to boost
interest in higher yielding assets. This triggered strong intraday rallies in
both the AUD USD and NZD USD.
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Mon 18 Dec
10:00 EZ- final HICP Tue 19 Dec
09:00 DE- IFO Survey
13:30 US- Housing Starts/Permits
13:30 US- Current Account Wed 20 Dec
15:00 US- Existing Homes Sales
15:30 US- EIA Crude Thu 21 Dec
03:00 JP- BOJ Decision
13:30 CA- CPI & Retail Sales
13:30 US Weely Jobless
13:30 US- GDP Fri 22 Dec
09:30 US- GB- GDP
13:30 US- core PCE Deflator & Presonal Income
15:00 US- New Homes Sales
15:00 US- final University of Michigan
17:00 US- early Closes Mon 25 Dec
00:00 Christmas Holidays
Potential Trading Opportunities
POTENTIAL PRICE RISK: Medium Mon--10:00 GMT-- EZ- final November HICP. flash data are rarely changed.
POTENTIAL PRICE RISK: HIGH- Medium Tue --09:00 GMT-- DE- IFO Survey. Key report but usually not a market-mover
POTENTIAL PRICE RISK: HIGH- Medium- Tue --13:30 GMT-- US- Housing Starts and Permits. Leading indicators of activity
POTENTIAL PRICE RISK: HIGH-Medium- Wed --15:00-- US- Existing Homes Sales. Top Housing statistic
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