30th October - How far can the Dollar go ?
03 November 2014
TECHNICALS:
Monthly chart
This chart is a salutary reminder of the scale of possibilities for the Dollar Euro.
First stop for the strengthening Dollar is clearly the 1.18- 1.20 level whence the market has bounced a number of times in 2008, 2010 and 2012.
But should that level break then an exciting top formation will have completed for the Euro suggesting very much lower levels.
The long-term up-trend support for the Euro is around Parity.
And should that break then look for 0.85 or so, where the market found support in 2000.
Daily chart
In the very short-term, note the current well-constructed bear trend, in which prior lows (in this case 1.2858) are good resistance, ratcheting the Euro lower.
Note too, the small H&S continuation pattern that has just completed. That is suggesting a fresh bear move through 1.2499 …
FUNDAMENTALS:
As it became clear that the US economy was set to make a strong recovery from the weather induced weakness of the 1st quarter, the Dollar responded and began to rally against the Euro and other major currencies.
The move was fuelled by two main factors:
Subsequent releases of US GDP have confirmed that the US economic recovery is indeed on track with strong showings in both Q2 and Q3 GDP, the later released earlier today.
Moreover, in yesterday’s FOMC policy statement, the Fed, as expected, announced the end of QE3 and the taper policy. Policymakers judged the economic recovery was becoming sufficiently self-sustaining, noting the recovery in the labour market.
But they surprised with their comments about interest rates.
The Fed has long maintained its stance that rates will remain low for an extended period. But in yesterday’s statement that commitment was replaced by a more balanced stance that leaves the way open for the Fed to begin hiking rates sooner if the economy out performs the Fed’s expectation but equally, rates could be left unchanged longer if the economy turned unexpectedly weaker. The message markets are taking from this is the Fed will hike sooner if they judge the recovery can take it.
This sets the stage for what we understand to be a significant Dollar rally.
As already noted the Euro zone is sliding towards deflation and recession despite the ECB moving some rates into negative territory and starting a bond buying program that falls just short of full blown QE. To make matters worse the German economy, for so long the Eurozone’s growth engine, is also cooling and a recession there looks to be a growing risk.
In the UK the heat appears to be coming out of the red hot housing market and it is feared the weak Euro zone could cool the UK recovery. Add in political risk associated with the UK’s membership of the EU and the Pound looks vulnerable.
Then there is the Yen; despite successfully driving up inflation and flooding the market with easy money, growth has not appeared as expected.
No other major Central Bank apart from the Fed is laying the ground work for higher interest rates and although the Bank of England is expected to hike some time next year, low inflation and fears of slowing growth offer UK monetary policy makers time to wait and see.
In summary, the Fed believes the US economy is set firmly on the road to self sustaining growth and with unemployment currently at 5.9% and looking to go lower, policy makers have to carefully start the process of policy normalisation. Remember the end of QE3 is not a tightening, the Fed has just stopped adding new stimulus.
In summary we judge the Dollar to be a buy and can and will rally much further especially against the Euro.
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