USD Comeback Act

Posted by Rob

July 18, 2008

After Monday’s record euro high breaking through $1.60 against the dollar, we are now seeing some strength and resilience in the US dollar.

The recent fundamental news coming out from the investment bank Wells Fargo seems to shed some light on the ability of such banks to withstand pressure from the credit crunch.

Derek Halpenny, head of currency research in London at Bank of Tokyo-Mitsubishi said, “we’ve had a big two-day rally in financial stocks in the U.S., which brought about a degree of stability. Generally speaking there’s a belief in the market that conditions will stabilize, that’s given the impetus to the dollar against the euro.” - Bloomberg

However, according to Mr Halpenny the dollar isn’t out of the woods yet, with expectation of a dollar decline towards $1.62 against the euro.

As we previously reported, a Bloomberg survey showed that economists expect the dollar to weaken further against the majors over the next six months.

What can we expect for EURUSD over the next few days…

Technical Chart: EurUSD 1-hour

EURUSD 1-hour (18-07-08)

From the 1-hour euro-dollar chart we can see that the last two days have shown some choppy lateral movement.

Although the price action has moved up towards the 38.2% Fibonacci line, we can see that there has been significant resistance as the pair have failed to rally past this line.

If we look at the 14-day RSI we can also see some significant resistance, paralleled by the price action. The recent highs have fallen back without any break through.

In a situation like this, one strategy would be to hold back trading until there is a break past the resistance line, or a break below the 200-day moving average (blue line). With the 200-day moving average moving upwards, we could see some euro gains once the pair can break past the 38.2% Fibonacci retracement line.

If there is a break past $1.5880 we may see some further resistance in the region of the 50% Fibonacci line, therefore gains may be capped. If entering a trade, bear this in mind with risk/reward management.

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