Gloomy Outlook For The Dollar

With the EUR/USD printing new yearly highs of 1.3410 before consolidating back to the 1.33 level, another gloomy week for the dollar bulls ended. Despite this, it was certainly a week full of trading action, with events like the FOMC rate decision and a variety of Housing related data being released.

As we mentioned last week, the main thing that was weighing on the dollar these days was the sub prime problems, which was making investors think twice before buying it. As the sentiment became quickly dollar negative, any bad news out of the US was welcomed with a hard sell off in dollar related pairs. The first piece of news was relatively dollar bearish, with the NAHB Housing Market Index printing lower figure than expected, and the market set the tone for dollar sales which continued through the week.

As expected, the Fed decided to leave rates unchanged once again, leaving the market staring in its crystal ball as it tried to predict their future plans. We believe that the Fed’s statement was not as bad as market perceived it as although it was on the bearish side, the phrase ‘additional firming may be needed’ was nowhere to be seen. As normal though, the Fed was vague and the market struggled to interpret their actions and predict further moves.

Sometimes this can be frustrating and Wednesday saw traders sell off the dollar by almost 100 points after the statement and stocks rallied for the first time in days. This indicated that market is trying hard to see clearly, but when uncertainty creeps in the dollar is immediately sold. These moves don’t last long though, and sure enough, the Euro rejected the 1.34 level very fast. The EUR/USD fell to the 1.33 level, but Friday’s better than expected Housing data led it to break 1.33 and close the week at 1.3285.

But is the market now ready to buy the dollar and forget the so-called slowing of the economy? Perhaps Friday’s better-than-expected Existing Home Sales figures will be enough for the market to forget the Housing problems that weigh in the economy? Closely observe this week’s Housing data to assess any impact this news may have had.

Today saw the New Home Sales print a very disappointing seven-year-low figure, taking the EUR/USD up to 1.3345. This bad news was welcomed with a great sell-off in all dollar related pairs, causing great concern among market traders that a crisis in the economy may not be too far away.

Later in the week we have Consumer Confidence and Durable Orders to look forward too, plus the Chicago Purchasing Manager which we think will determine the dollar’s direction; perhaps even forcing the EUR/USD to new yearly highs of 1.35 if the news is bad. Furthermore, we have some news from the Eurozone and Germany’s IFO, which will need to be watched in order to see how the European economy performs.

Bernanke will be testifying in front of the Joint Economic Committee, which will be interesting, especially if he downplays the problems in the Housing Sector or if he admit to any problems. Expect second thoughts concerning rate hikes if he does. Most analysts believe that the next move by the Fed will be a rate cut, however as their policy always is so hard to read, we might end up being none the wiser.

One thing is for sure, all these bad indicators are making the market very nervous about the state of the economy and while there is not much data coming out this week, expect this feeling to continue, and the EUR/USD to stay in a tight range, until an event triggers an upward rather than downward move.