The US dollar rallied sharply yesterday and has built on those gains so far today.
The US dollar rallied sharply yesterday and has built on those gains so far today. The turnaround in the greenback’s fortunes has certainly been swift. If we look at the EURUSD (the world’s most actively traded currency pair) chart we can see that on Tuesday the pair hit its highest level (1.1465) since October last year. Earlier today it traded below 1.1240, a swing of close to 2% in favour of the dollar in less than three days. The big question now is whether the dollar is set to strengthen further or if it will continue the slide that began at the beginning of December last year?
Chart-wise, the area around 1.1425 was obviously acting as resistance. This area corresponds with the 0.76 Fibonacci Retracement of the August-December 2015 sell-off. Below here the first support comes in around 1.1250/60 – the 0.62 retracement of the same move. The EURUSD has already dipped below here today, but what we’re looking for is a decisive close below this level – not a dip. If the dollar rally has got legs then we should expect a test of the 50% retracement around 1.1100 or so. We can see that this acted as support a couple of times in September last year. But even if the EURUSD does fall this far, it still won’t invalidate the gentle uptrend indicated by the pitchfork which is also displayed.
But what’s the fundamental outlook? That all depends on the central banks, particularly the US Federal Reserve and the ECB. The EURUSD has strengthened this year despite additional easing from the European central bank in March. Now there is a feeling that the ECB has reached its limits when it comes to loosening monetary policy and can’t do any more. At the same time the Fed has back-pedalled on its December prediction to raise rates by as much as 100 basis points in 2016. If ECB President Draghi hints of further easing, or investors decide that the Fed has to raise rates at least two times this year then the EURUSD could head back down towards 1.0500 or below. Otherwise, the dollar could have further to fall.
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