Is a stronger Dollar the best option for the US economy right now?

During the first trading of the week the price action in the major instruments was smooth and straight-forward across the board and quite interesting as well. We’ve mentioned our concerns on whether the recent Dollar rally can continue heading into the FOMC meeting on Wednesday and it seems that market participants are sharing the same views.

To get into some detail, tomorrow the Fed will be meeting to discuss the monetary policy for the coming period, whether to leave rates where they area and what are their bias for the next few months. Although we know that there is no chance that they will change interest rates right now there is a growing concern that they opt to leave the current policy in place for the rest of the year.

The reason behind this way of thinking is that even though the central bankers would like to raise rates to help with the recovery and growth of the domestic economy they’re very concerned about the global slowdown, especially in Europe and Asia. A higher interest rates policy would result into a stronger Dollar but that would mean that exports and business activities for the major international companies based in the US would be pricier. And that’s a huge concern for the Fed as it would mean risking any growth prospects in general.

As such traders are being very defensive against the Dollar as we draw nearer to the FOMC meeting tomorrow as we’ve seen during the past 24 hours. The US currency has pulled back against the likes of the Euro, the Pound, even versus Gold. The Single currency has moved toward the 1.1100 area but has managed to reach only as high as the 1.1060 level where we find it this morning. We could see a further correction from there with the 1.1140 area being the first resistance level in sight but in general we need to be very careful in timing our trades on the Euro this week.

Similar to the Euro, the Cable traded higher as traders are being cautious against the Dollar and that has allowed the UK currency to breathe a lit bit easier. The Cable has bounced up from the 1.5300 area and this morning is trading around the 1.5350 level ahead of the release of the GDP levels. We could see a further correction in the Cable especially if the GDP figures print in a positive manner and based on Dollar’s weakness we could see it trading above the 1.5400 barrier today.