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Dollar Could Show Signs of Weakness in the Coming Weeks!

Mon, Nov 17 2008, 10:54 GMT
by Lena Manousarides

FXstreet.com Independent Analyst Team

Another week has started with G20 not providing any more insight to the markets and therefore risk aversion coming back in the first hours of market opening. EUR/USD opened lower last night and continued to slide in early Asian session. However, after European opening, we saw a great comeback of the euro and the pound, with traders squaring up gains and getting ready for another “wild ride” this week.

EUR/USD is trading within a bigger range between 1.25-1.28 and only a clear break can lead us either to 1.2350 or 1.30. The pair found good support at 1.25 and therefore corrected quite aggressively towards 1.27. Next level to watch will be 1.2750 ahead of 1.28 which could find strong offers. On the downside, if 1.25 gives way then 1.2430 ahead of 1.2380 comes back to play.

At the moment is clear that traders do not want to commit in something bigger and they wait therefore for any signs as to what the direction will be. Markets have already priced in the negative data in US and Europe and they already know that the situation is bad, so right now they are at a point to either wait patiently until the crisis blows over and start buying heavily or to continue with the selling.

Today the economic calendar is almost empty with couple of releases out of US which are not expected to make any noise. The markets are getting ready for Bernanke s testimony later this week along with the Bank of England’s minutes. After the last meeting, this may give us more insight as to what went on and why the Bank decided to cut rates so heavily. The economic situation in England is getting worse by the day and the unemployment figures showed that by 2010 the number of unemployed people will reach proximately 3.000.000. This fact in combination with slow growth and deteriorating economic conditions is making BOE even more determined to “fight” recession by any means even if that means taking the interest rates down to zero!

GBP/USD is making a good start this morning after London opening, with the pair moving up more than 300 points and finding resistance at 1.4970. The pair found support at 1.4640 and bounced back from there in a sudden move which shows that traders might take their profits before continuing lower. However, markets wait the minutes from BOE before they commit either way or also the inflationary data which are out in the coming days. If CPI and PPI are both lower than the bank really won’t think twice about cutting even more next time in order to bring some kind of stability.

The bottom line is this: Market participants, investors, traders, you and me know very well that the world is at risk of recession in the coming months. We know that as from today, Japan is in recession after GDP contracted for second consecutive month. We also know that UK and Germany are in recession and US very likely too. So, we know there is probably worse to come but we also know that the crisis will at some point start to ease and traders will want to jump the chance to buy back aggressively and be on board when “the train leaves for Northville”!

History shows that December is always a month of dollar weakness and therefore this time the weakness could very well be exaggerated and more traders could sell the buck to lock up their gains of all those months. Maybe December is the month that traders need in order to start a temporary correction and take euro and pound higher! Let’s put it another way, risk aversion will always be here… But so will the prospect of a better economic tomorrow…

Published on  Mon, Nov 17 2008, 10:59 GMT