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FX Technical Strategy

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Is the dollar close to turning?

Thu, Jan 15 2009, 11:38 GMT
by Lloyds TSB Financial Markets Economic Research Team

Lloyds TSB Financial Markets

Market overview

The first two weeks of the new year are usually a good period to avoid from a trading perspective, but once again the market has managed to deliver in excess of a month's worth of price action in just a few trading days. Whilst it is generally acknowledged that volumes are thin, those that have kept their powder dry will hopefully be encouraged into the market in the coming trading sessions. As volume starts to increase, dollar weakness is the expected prevailing theme.

The current market's expectation that European bond yields have to fall in line with UK & US yields has so far caused the current weakness in the euro. The main sticking points with regard to extending this trend against the dollar are equities and commodities. It is clear that precious metal demand has increased. Whilst this can be discounted on the market's safe haven attitude, the increasingly positive signals in base metals and the modest reversal in the baltic dry index and softs are implying that the market can not get too complacent about ever falling commodity prices. Euro bears should then look to euro swiss and euro sterling as the main way to express this view, but euro dollar should find support (possibly long term) between 1.30 and 1.3150. This is not a clear cut situation and hopefully into next week we should get some clarity.

Should this theme continue to build, the main currencies to benefit will be sterling, the Norwegian krone, and the commodity currencies to the detriment of the US dollar. The former is potentially in the process of creating a major top, but like everything in the markets, timing is key. A push into 7.29 would see the first attempt to fade the trend, but given the significance of resistance at 7.31, caution is still required.

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Published on  Thu, Jan 15 2009, 11:43 GMT