EUR/USD – Dollar's 8-month high continues to slip away

Yesterday, the dollar lost its 8-month peak against major currencies as investors continued to sell their positions in order to profit from the dollars latest rally. In addition, many of the investors like me are not taking any risks with the dollar in sight of the indebted mortgage giants Fannie Mae and Freddie Mac's apparent need for governmental assistance.

A combination of these factors as well as the recent rise in gold and oil prices has brought the dollar's rally to a halt. On the other hand, the rise of oil to above $116 a barrel was not as helpful to the euro and the sterling as expected, reflecting the bearish sentiment towards these currencies.

Nevertheless, the losses in the dollar were minimal in sight of a slowed growth around the world which might prompt cuts in interest rates in the world's largest economies besides the U.S.
Traders are expecting key European data later in the day in order to estimate the state of economic health of this region.


According to the Finexo currency trading room euro dropped 0.2% and stabilized at $1.4776, remaining above the 6-month low of $1.4630 hit on Tuesday. This adds up to a total of 8% fall from its July record peak of $1.6040.

EUR/USD recovers further today but still fails to take out 1.4830 resistance. Outlook remains neutral for the moment. On the upside, break of 1.4830 will confirm that a short term bottom is in place and bring stronger rebound, probably to test 1.5284 double top neckline resistance before staging another fall. On the downside, below 1.4672 minor support will flip intraday bias back to the downside and break of 1.4629 will indicate that recent decline from 1.6038 has resumed for next target of key medium term support at 1.4309.

Britain economy facing crisis

Concerns about the economy of the UK weakened sentiment, thus hurting the sterling which dropped to a 21-month low on Monday. According to a recent survey, businessmen and factory owners do not expect the growth of their businesses in the near future due to the poor state of the economy. More than a third of business owners believe that they will have no choice but to cut jobs and bonuses.

Despite July's manufacturers' costs falling more than expected, the numbers were still higher than last year's, providing some support to the pound. This also sparkled expectations of an interest rate cut from the Bank of England, meant to boost economy growth. I think now that the economy is in such a bad shape, any encouraging news matters and will surely make some difference.

Actually what i believe is that the expectations of a cut in interest rates usually damage the currency by lowering its yield advantage, yet in the case of the UK economy in which growth has slowed so significantly, these prospects easing the UK's borrowing costs, could actually become an advantage.

Until the present, the BoE has been stuck between a rock and a hard place, with growing inflation on the one hand, and the limited ability to cut interest rates in the face of no growth, on the other. The Financial Services Authority of Britain has issued a statement that the industry should prepare itself for a possible crisis; similar to the one Britain went through during the 1990s recession.

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Dollar Loses its 7-Month High and high volatility seen.

According to the news update I read today at FINEXO the dollar lost ground against the yen, thus retreating from its 7-month high achieved due to the fall of oil prices to a 3-month low. Many of the traders preferred to sell on the profits of the previous day, in which the oil's drop beneath $120 a barrel supported stock gains and investors are willing to take more risks after yesterday's new found support in the dollar.

When investors are willing to take more risks, this usually means the renewed investment in low yielding currencies like the yen in order to profit from higher interest rates somewhere else, also known as carry trading. Despite this short-lived profit-taking, analysts believe that the dollar will continue its rise.
My growing concern is about the Japanese economy, which might increase dollar buying. The yen is under pressure due to a series of data suggesting that Japan's postwar economic growth might be coming to an end. This supports views that the Bank of Japan would probably leave interest rates unchanged at 0.5% in the near future.
Market players are closely monitoring the yen to see if it can break above the 109.95 yen resistance, the highest in almost 6 years. The dollar eventually stabilized at 109.40 after a drop of 0.4 percent. The previous day's 7-month peak was of 109.89.

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