Foreign Exchange, Dollar Lacks Direction

Foreign Exchange Dollar Lacks Direction

End of August trading has left the currency markets somewhat lacking in direction. As such, the upcoming non-farm payroll number will be eagerly awaited this week, as of course will movements in the oil price, given the dollar’s positive reaction to the US$1.00/b drop in prices at the end of last week.

Anyway, you all know our fundamental view of the EUR/USD exchange rate. We still think the dollar can ruffle a few euro feathers over the medium term and rally towards EUR/USD1.1000 and possibly even EUR/USD1.0000. We think that the current account deficit can be financed relatively easily, given that appetite for US assets will not diminish in any significant fashion, and that, despite market fears at the moment, the US economy will prove to be far more resilient and dynamic than its European counterpart.

In the short term, let’s look at the technicals. The euro is still showing upside possibilities, with the two-month uptrend in place. A move above 1.2350 sets up a rally to 1.2500, a break of which would suggest further gains to the 1.2800 area. However, on the downside, support for EUR/USD exists at 1.2200, and then the 1.2130 area. Any slide through these levels would set up a test of the major 1.1900 area. This level sits on the neckline of the potential head and shoulders pattern on the monthly chart, which we feel will eventually give way, once this period of euro strength has run its course. In the meantime, we are watching closely the above parameters.