U.S. Dollar Support Continues to Hold EUR/USD Back
Trichet may be a hawk now as German economic numbers force his hand to back up his March statements of inflation causing him to consider a rate hike. In just three days the ECB will be meeting and the consensus is for the 1.00% rate to be increased to 1.25%. The euro continues to shrug off the problems in Ireland, Greece, Portugal, and Spain and with the ECB naming inflation the main concern, Trichet’s statement of requiring “strong vigilance” is going to meet its first test Thursday. But it’s not really the first 25 basis points that is the issue. That’s expected and no rate hike will send the EUR/USD tumbling to 1.4000, easily. It’s the second hike that is being discounted; the expectation for 1.50% to be reached this year that is in question. No one is convinced on an ECB “one and done” scenario.
But then there’s the U.S. Dollar which is still maintaining support above the 76.00 level. This has been keeping the EUR/USD below 1.4250 and despite a push to 1.4268 today, there’s a stall that is visible as the uptrend is being met with selling pressure just above 1.4250. The steady support along the 20 period SMA has provided aggressive swing buy opportunities, most recently on Friday.
Despite the near-term resistance, don’t neglect the bullish Directional Bias on the daily EUR/USD
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On the flip side of this bullish EUR/USD is the longer term debate that is growing concerning whether the tightening will put Europe into a recession as the debt defaults will weaken the currency. This argument is being led by none other than John Taylor, chairman of FX Concepts, the 8.5b dollar foreign exchange hedge fund.
Is the euro irrationally exuberant – shrugging off too much negativity? There’s a decent argument for that, especially if the U.S. Dollar can – at very least – transition out of the downtrend and into a more sideways market on the daily time frame. I’m not expecting that near-term however since one and maybe two rate hikes are being baked into the cake.
The question then is how long will the Fed keep borrowing rates at their current levels? The hawks are growing in numbers and their voices are getting louder. That’s initially going to be enough to put a near-term floor in on the U.S. Dollar Index which has pierced but spent very little time below 76.00 since rallying above it on March 23. Dissenters include New York Fed President Dudley would called the on-going recovery “still tenuous”.
Even though there may be some temptation to fade (sell) the 1.4250 to 1.4268 area on the EUR/USD, any such entry is extremely aggressive and should be considered only on short-term time frames (five, 15, and 30-minute charts) with a stop-loss at 1.4283 at most. This is because the daily time frame is still dominantly bullish and increases the likelihood that pullbacks will be bought into.
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