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Dollar continues to fight an uphill battle going into the FOMC meeting

Dollar continues to fight an uphill battle going into the FOMC meeting

26.4.2011 9:16

After several sessions of thinned trading conditions due to the Easter holidays, market activity will gradually return to normal today. Yesterday’s US session didn’t change the overall picture for EUR/USD trading. The pair is holding within striking distance from the recent highs, but for now there is no trigger for more follow-through gains. This morning, the EUR/USD cross rate is slightly lower compared to yesterday’s intra-day highs. On the financial newswires, there is some ado about comments from ECB’s Trichet in a newspaper interview. Trichet was quoted as saying that the ECB will do its utmost best to prevent higher oil and commodity prices to filter through into other prices, but he also said that hasn’t happened yet. On the currency markets, he said that he shared the view that a strong dollar is in the interest of the US. With the dollar at historically low levels on a trade-weighted basis, this quote can be seen as somewhat of an hidden critics on the current US monetary policy and its impact on the currency markets. However, at this stage there is no indication at all that valuation of the euro (or even better the US dollar) will make the ECB to change its policy anytime soon.

Today, the calendar of eco data is again rather thin. There are no high profile data in Europe. In the US, the CS house prices, the Consumer confidence and the Richmond Fed Manufacturing index are on the agenda. We don’t expect these data to change the picture for EUR/USD trading. Traders will probably keep a wait-and-see approach going into the FOMC meeting which will start today (decision tomorrow at 18.30 CET). The market largely expects the Fed to continue its asset purchase programme and not to give any hints on a tightening of policy yet. If so, the Fed message should be no help for the US currency, but it also wouldn’t be a big surprise. So, in this context, one might expect sentiment on risk to remain an important factor for the day-to-day price action in the EUR/USD cross rate even as the broader picture (relative monetary policy stance between the Fed and the ECB) remains EUR/USD supportive. The debate on a potential Greek debt restructuring from time to time might continue to spark some euro nervousness. However, looking at last week’s price action, the impact of this issue on currency
trading was limited in time.

Recently, we had a bullish strategy for the EUR/USD cross rate based on the different policy approach between the ECB and the Fed, but we indicated that short term overbought conditions and extreme euro long positioning made the cross rate vulnerable to a short-term correction. Such a correction occurred on Monday last week. EUR/USD dropped temporary below the standing uptrend line since early January and below the 1.4282 November 2010 high. However, Monday’s shake-out was reversed with remarkable ease later last week.

The pair moved temporary north of the 1.4580 area (2010 high), but no sustained break occurred yet. The LT picture remains EUR/USD positive, but we don’t want to add EUR/USD long exposure at the current level. So, we still hope to add/re-buy EUR/USD at lower levels. The pair is again nearing the standing uptrend line since the year low. A drop below this trend (1.4490 today) could be an indication that a new correction might be in store, especially if this would coincide with a correction on the equity markets.

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