Will the Dollar end the year strong or will investors bank their profits?

Traditionally the week before Christmas is always one of the slowest and quietest periods in FX trading and we expect no different this time around. The currency markets have been pretty active in recent times especially after the Fed decision but now with only 4 trading days ahead of us we should expect reduced participation and price action.

The broader market theme is the fresh Dollar strength against its peers after the Fed decision to not only raise rates but also upgrade their future guidance. As a result we expect the Dollar to strengthen significantly next year against the likes of the Euro, the Pound and the rest of the world currencies. However we mentioned in our reports last week the possibility that this might not be the case during the last 2 weeks of the year.

Investors have had a good year being long Dollars and it might not have always been the easiest of choices as we’ve been through some volatile times but the US currency yielded a good return for its backers in the end. Given that good return though we might see a number of investors taking profits off the table during the coming 2 weeks in an attempt to rebalance their portfolios ahead of the next year. Such a development would mean that the Dollar could give up some of its recent gains against the other majors but only on the short term and to a limited extent.

The Euro ended last week finding support ahead of the 1.0800 area and bounced off this level a couple of times to trade towards the 1.0900 level. This morning the Single currency is trading around the 1.0870 area looking for direction ahead of the trading session. The economic calendar is relatively empty so any price action will be mostly dictated by Dollar flows. The 1.0900 area is the pivot at this time and as long as the Euro remains below that the bias is bearish, a successful break above it though might drive the Euro towards the 1.1000 highs.

The Cable bounced of the 1.4860 lows on Thursday and has been trading on either side of the 1.4900 level ever since looking for direction and momentum. This will be a really quiet week for the FX market and especially the Pound so we might see more of this consolidation between the 1.4860 and 1.4950 levels as traders are looking for a reason to enter the market. The pivot point for the Cable is situated at the 1.4950 level and any possible rallies to the upside have to overcome this important resistance level first.