Is the USD coming back?

So the much maligned USD shows some eagerly anticipated signs of life across the markets today as much of the doubts regarding the appointment of Ben Bernankes successor at the Federal Reserve appear to have been put to bed.

President Obama as we mentioned earlier has named Janet Yellen as his nominee .This is the nearest thing to a “safe pair of hands” that the market was looking for and should ensure the continuation of the much maligned (in some quarters) Fed tapering scheme. Second, an exit strategy from the fiscal impasse appears to be in the works and has helped dial down the anxiety over a possible default, which most investors did not think likely. The US Dollar Index is trading at new highs for the month.

Sterling seemed to finally succumb to the selling pressure that had been building as it lost the ground it had made on the back of the greenbacks woes. A shockingly poor UK industrial production, once again highlighting the divergence between survey data (PMI) and real sector data, has seen sterling shed over a cent to fall back below $1.60 for the first time since September 24. A break of the $1.5950 level could potentially be important from a technical point of view. It appears to be the neckline of a head and shoulders pattern, which if confirmed, would give potential toward $1.5650. The initial retracement objective of sterling’s rally since mid-July comes just above $1.5700. Industrial production in the UK fell 1.1% in August. The market had expected an 0.4% increase. Manufacturing slumped 1.2%. The year-over-year returns into the red at -0.2% from 1.0% in July. Adding insult to injury, the UK reported a larger than expected trade deficit (GBP9.6 bln vs consensus GBP9.0 bln). In contrast, and after the disappointing orders data yesterday, Germany reported stronger than expected industrial output figures. The 1.4% increase compares with the consensus forecast of 1.0% and the July data was revised to show a more modest 1.1% decline instead of the initial 1.7% drop. The euro showed little reaction to the news.

While the Federal government remains partially shut, the politicians appear to be edging toward a compromise. The compromise is not really over substance, but rather procedures. A short-term clean continuing resolution and lift to the debt ceiling would allow more time to negotiate. Defining “short-term” may be a good litmus test. Many Republicans will likely seek a shorter period, while Democrats may favor a longer period. The market may not wait for an official compromise to emerge from Washington, but will begin adjusting positions accordingly.

Initial euro support is seen near $1.35, but it may take a break of the $1.3450 area to confirm a top. Although yesterday’s close in the dollar-yen was not inspiring, the fact that there has been some follow through today and that it continues to hold above the 200-day moving average, which was frayed yesterday, also bodes well technically. A move above JPY97.50 may open the door to another yen rise toward JPY98.50.
As remarked in the past this is not the end of the woes for the greenback however it could be the end of the beginning.Keep your eyes peeled.

About Hetal Patel - Chief Editor, Europe

Hetal Patel has written 58 post in this blog.