Monday October 18, 2010 - 13:01:12 GMT
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U.S. Dollar Recovers on Federal Reserve Uncertainty
The U.S. Dollar confirmed Fridayâ€™s closing price reversal
bottom with a follow-through rally overnight. The Greenback hit a 10-month low
against a basket of currencies on Friday, but rebounded after Federal Reserve
Chairman Ben Bernanke expressed uncertainty as to how much monetary easing the
Fed would allocate to its quantitative easing program.
Following an almost 5 percent decline in October after
investors increased bets the Fed would apply at least $1 trillion of new
quantitative easing, traders pared bets on speculation the amount may not be
nearly that amount. The overnight trading action suggests that the market may
have priced in too much QE into the market.
Adding uncertainty over the Fedâ€™s next move along with
short-term oversold conditions, investors face the challenge to either take
profits on short positions or put up with a possible choppy trade until the
next Federal Open Market Committee meeting on November 2 and 3.
Some traders are also questioning whether Bernanke has the
votes to implement a strong enough QE program although itâ€™s been reported that
at least 2 Fed members are leaning toward supporting an aggressive QE program.
Bernanke said on Friday that he fears deflation more than
inflation. He also suggested that the Fed must do something to stay on course
to reach its mandate of 2% inflation. This can only be accomplished through
aggressively flooding the market with money.
So while there is a lull in the Dollarâ€™s downtrend and a
possible short squeeze taking place, many traders expect this current move in
the 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 consolidation
or short-covering rally until the Fed meeting.
The EUR USD closed below 1.40 for the week, taking the air
out of some analyst forecasts for a move to 1.45. The outside move closing
price reversal top could also be indicative of the start of a substantial
correction. Last nightâ€™s follow-through break confirmed the reversal top.
This weekâ€™s rally through the last swing top at 1.4028 to
Fridayâ€™s high at 1.4159 appeared labored. At times it seemed traders were
tentative about going long at such a lofty level. In addition, much of the move
seemed driven by a comment from the ECBâ€™s Axel Weber calling for an end to the
central bankâ€™s asset buyback program rather than sound economic reasons.
Although the weakness started early in the U.S. session,
Federal Reserve Chairman Ben Bernanke didnâ€™t help matters much when he failed
to clarify the Fedâ€™s quantitative easing plan.
Bernanke gave a speech on Friday which failed to give
traders the clarity they needed to continue to pressure the Dollar. Some feel
that Bernanke may be lacking the consensus he needs to implement the QE program
that he feels is necessary to revive the economy.
Technically a break through the last swing bottom at 1.3775
will turn the main trend down on the daily chart. The main trend indicator
turned long on September 1. Besides turning the main trend to down, a break
through this level may be setting up for a 50% correction of the 1.2587 to
1.4159 range to 1.3373.
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