Don’t Build on Bernanke to Stop the Dollar’s Decline


WWBD?? What Will Bernanke Do? Apparently not much to stem the tide of USD weakness that has enveloped the currency over the last few weeks. The EUR, after flirting with the 1.3500 level a couple of times over the last few trading sessions, finally broke through that level quite convincingly in early European trading.

Traders are liking the news they are receiving out of Europe concerning economic activity and at the same time, U.S. economic numbers continue to disappoint. The market is now convinced that the FED will continue with their asset purchase plan for awhile and this infusion of capital will continue to hinder the USD.

The next news release that will have effect on the EUR is Eurozone Consumer Confidence, due out at 10 am, in Europe. This number is expected to rise to 88.2 from last month’s 87.

After that, we wait for the US morning release at 10 am of ADP employment change for January, which should be around 160,000 after a previous 215,000. Then GDP at 1:30 which is expected to slow back to 1.2% annualized, for Q4 2012 from 3.1% for Q3, followed by the FOMC announcement later in the day.

See how to trade the US GDP with USD/JPY

All these releases as well as the non-farm and ISM release on Friday, will continue to add volatility to the market. The strong move in the EUR is not aiding the other currencies. JPY, GBP, AUD and CAD are all struggling against the dollar. This latest EUR move is not a “risk on” play, but simply traders betting on one economy improving faster that another.

As for the FOMC, no one is really expecting anything to change.

It is the accompanying statement that will affect the market. One only has to look back to last week’s Bank of Canada statement to see how a currency can be effected by a central bank policy statement. The statement is expected to remain dovish, but here again there is uncertainty. Due to voting rotation, four new presidents are on board. Two of them are expected to be dissenters of the present FED policy, but this will remain unknown until the minutes are released later this month.

As far as the currencies are concerned, the EUR rally does not seem to have cap to it. We have crashed the resistance level at 1.3500 and flirted with the next level of 1.3535. The currency is well bid and it will take some major news to reverse this trend in the short term. It seems the market has caught many buyers waiting for the retracement and these buyers, not position takers are being forced into action. A break of 1.3535 tests the 1.3560 level. The overbought conditions on the technical charts are being completely ignored for the time being.

JPY weakness continues at the USD/JPY tests resistance at 91.40, ahead of a targeted level of 91.75. Only a close below the 90.75 support area would reverse this trend.

USD/CAD is inching back towards parity trading below 1.0025 for most of the overnight trading session. An early move towards parity was stalled at the 1.0005 support, but this currency pair seems heavy and it looks like those corporate buyers who did not take advantage of the “cheaper” loonie, may end up regretting that decision.

Mostly, it’s all EUR vs USD and the single currency is decisively winning that battle. It looks like a wild Wednesday for the North American trading day.

Further reading: Expect a Choppy and Unpredictable Finish to a Dramatic Month

Get the 5 most predictable currency pairs

About Author

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.