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EUR/USD Rejects 1.60 Again! More Dollar Strength Expected?

Mon, Jul 21 2008, 13:58 GMT
by Lena Manousarides

FXGreece

Last week’s main event was Bernanke’s testimony in front of the House of Representatives, where he was once again interpreted as being negative by the already biased markets. Of course Mr. Bernanke stated that the “top priority” of the bank is to help financial institutions when in trouble and therefore his and Paulson’s rushed to bail out Fannie Mae and Freddie Mac confused the markets even further.

What started as a very negative week for the dollar and DOW JONES, ended up with both returning to positive territory as the latter broke important resistance levels of 11400. News that J. P. Morgan and Citigroup announced better than expected earnings results, gave traders renewed confidence that recession has not yet hit. Members of the FED were hawkish when it came to inflation which was clear after the FOMC minutes and showed the banks next move in hiking interest rates may happen sooner rather than later.

The EUR/USD has traded in very narrow ranges since Thursday, between 1.5760-1.59, and that is likely to continue over the next few days. A clear break of those levels could give us a clue as to the next direction it will take. For now, the daily chart shows 1.6040 is the top and will stay so for the coming weeks.

This week’s calendar is almost empty, with the most important news being the German IFO, which will be monitored closely; as last ZEW data showed very poor numbers. The fact the euro is hovering near 1.60 is not taken lightly by European officials and rumors were heard that intervention was the reason why the EUR/USD didn’t continue its move above 1.60.

Other economic events this week include the Bank of England’s minutes from their last meeting and a testimony by Mervin King in front of the Treasury Committee regarding the latest economic developments. The pound is still weak against all currencies and although we saw an upsurge in GBP/USD towards 2.00, this was due more to the dollar’s weakness than sterling’s strength. The latest economic figures from the Housing Market show further deterioration and the fact that inflationary pressures are high only makes it harder for the bank to act. On one hand, inflation means raising rates, but on the other hand the fact the economy is struggling lately makes it more complicated, and another explanatory letter regarding high inflation may be in the cards. Whatever happens, this week we may see some rather erratic moves in the pound and there is further risk of losses against all currencies.

On the US calendar front, we only have the new home sales figures, together with existing home sales. Analysts predict that those numbers will come out negative again, however the markets have already priced in the worst. A better result is more likely to give us bigger moves and therefore we may finally see the dollar strengthening across the board.

Let’s not forget one thing, currency fluctuation has become so erratic, trading sometimes feels like nothing really works; fundamental or technical. The reason is the markets are controlled by fear and uncertainty and only the big players can enjoy the action as their main goal is to hit the stops. This can be seen in oil too, as one day it climbs four dollars and the next fall’s seven or eight. It’s clear that until we see some calm in the market sentiment, this will continue, so the only thing we can do is step aside and watch for those occasional golden opportunities.

Published on  Mon, Jul 21 2008, 13:59 GMT