Fed Expectations Fuel Greenback Gains

Posted by Rob

August 5, 2008

The US dollar gained against the euro today on speculation that the Federal Reserve will reiterate the need to curtail inflation whilst sitting tight on the benchmark interest rate later today.

According to Michael Woolfolk from Bank of New York Mellon, “the market is looking for any excuse to buy the dollar. Lower crude oil is the primary catalyst for the dollar to rally into the Fed meeting.” – Bloomberg

Yesterday the dollar reached $1.5576, however today it rose 0.6% to $1.5487. A recent fall in crude oil also favoured the dollar against the euro.

The euro isn’t helped either by a slowing economy in the eurozone. It is expected that the European Central Bank will retain interest rates at the next meeting, to help offset the slowdown.

Technical Chart: EURUSD 1-hour

EURUSD 1-hour (05-08-08)

We can see the sharp USD rise against the euro as the dollar climbs close to a seven-week high. The strong downtrend, in favour of the dollar is matched by the technical indicators.

The chart shows that the 200-day moving average and the 55-day moving average are bearish for the euro.

The Bollinger band however, shows that the price action has stepped outside the lower band, suggesting there will be a recovery. If the price breaks through the strong downtrend line (orange line) we could see a euro recovery. If this happens we could see the euro gain to the 23.6% Fibonacci line or even the 38.2% Fibo line.

Maintinaing the saying “the trend is your friend” suggests looking for short signals. With the imminent news release, it may be to early to enter at this time. Therefore waiting for the news release and subsequent spike would give us an idea of direction once it has settled. None-the-less short signals are what the technicals are suggesting over the coming day-or-so.

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