The Dollar may have seen short-term bottom
Analyst : Welly Wu (FXCM Asia Currency Strategist , FXCM Asia Currency Strategist )
2012/02/07 09:00
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The U.S. released its employment data with a much stronger result than expected: there was a 24.3 K jobs increase in January, and the unemployment rate dropped to a near 3-year low at 8.3%. The better US jobs report has continued to confirm that the U.S recovery is improving, which also means the calls for further easing from Fed are likely to subside. The greenback was trading lower in the past 2 weeks owing to the Fed’s lower-for-longer rate pledge and Bernanke’s mention that QE 3 remains an option, but the jobs report has slashed the likelihood of QE 3 in the near future and supported the Dollar to recover lost ground. A short-term bottom for the Dollar is likely as the DJ-FXCM Dollar Index bounced from critical support at 9,700 (Fibo retracement 61.8% from 9440 – 10080), and a rally above 9830 will resume its uptrend.

The greenback found additional support from safe-haven demand, as renewed fears that the Greek deal could collapse and additional aid from the EU / IMF may not be approved before the deadline. The Greek officials have claimed many times that the process is close to the end, but after weeks of negotiations there is still a lack of any concrete agreements. Besides, even if the debt write-down negotiations between private creditors and the Greek Government reach an agreement, the Greek debt levels are still unsustainable in the long run. The market has lost its patience to wait for Greek debt deal to be concluded and the Euro continues weakening against most of the major currencies. This week the ECB will hold its interest rate meeting on Thursday, and the benchmark rate is expected to remain unchanged. The market will keep an eye on the post-meeting conference, especially if the ECB responds to the Greek debt relief progress, and any hint on the LTRO measures which are expected to launch in late February.  The EUR/USD was trading in the consolidation range between 1.3000-1.3240, upside penetration will call for a further rebound towards 1.3450-1.36 levels, while a downside breakout below the 20-Day EMA will open the way towards its yearly low at 1.2630.

Other than the ECB, the RBA and BOE are going to hold their rate decision meetings this week. Australian Prime Minister Julia Gillard has recently commented that the central bank has scope to cut interest rates further in order to cope with the European debt crisis. Economists predict there could be 100 basis point cut in 2012, and the market forecasts a 25 basis point rate cut this week. Even if the central bank stays on hold, the bearish interest rate outlook does not support the Australian Dollar to rally sustainably at the current price levels. The AUD/USD is testing the critical resistance at 1.0750 on Monday’s European market, and a failure to make a concrete breakthrough above it will carve out a triple-top and spur sell-off pressures, with short-term support located at the 10-Day EMA at 1.0640.

Last but not least, the BOE is expected to hold its benchmark rate unchanged at 0.5% on Thursday, but the market is focusing on whether the Bank will take additional steps to stimulate the economy, which has been forecasted to contract in Q1 2012. The central bank may expand its asset purchases further in order to avoid a double-dip recession. The Cable has found resistance on the 150 Days moving average at 1.5850, and a slide below 1.5730 may call for further weakness towards 1.5500


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