As I mentioned in my podcast at the start of the week, this was one which was likely to be characterised by some volatile, but profitable trading opportunities. And this was certainly the case. However, unlike many other commentators, I was not one who expected the FED to do anything other than further delay tapering of their bond buying program. After all, given the parlous state of the labor market, in particular the participation rate which is at an historic low, could the FED, in all honestly have done anything else, but to step back from the brink.
Coupled with this scenario the NFP data earlier in the month was poor, and with the ever rising tide of US citizens now claiming food stamps there was little else the FED could do, but continue to print money. The debate that is now in full flow, and indeed has been since the flight to QE programs around the world, is simply the question that no one can answer, which is whether this strategy is even going to work.
The FED is now between a rock and a hard place with bond yields threatening to rise, a potential housing bubble in the offing, a stock market that is booming and grossly over extended, and leaving them little room for manoeuvre.
This is the dilemma that the FED is now facing, along with other central banks, and should the current situation continue then we may witness a secondary after shock to the financial markets, which could be even more destructive than the first. It is ironic that this situation has occurred 5 years since the collapse of Lehman Bros.
All of this was played out on the US dollar index chart and the response from the dollar was as expected, given the technical picture on the daily chart. For some time now I have been referring to the support and resistance areas as shown by the green and yellow dotted lines. Of these the green support area at 10,670 was the most critical over the last few days, and as I have written in previous posts a breach of either would see a breakout from the current trading range.
The breakout duly occurred on Monday with the index initially opening gapped down. This was as a result of the decision by Larry Summers to withdraw from the race to be the next FED chairman. The FED decision on Wednesday then merely reinforced the downside break, in an explosive manner, in a wide spread down candle that took the index well beyond 10,500, to close on the day at 10,481.
Since then we have seen a modest recovery for the US dollar, but the current outlook remains bearish, and in the short term we are now likely to see a test of the technical support region at 10,475. Overhead we now have a sustained zone of price congestion, clearly defined by the volume at price histogram with three extremely deep bars neatly sandwiched between the two dotted lines of support and resistance.
This weekend, of course, sees the second of our major market moving events, namely the German elections. Here too any surprise, in particular should Angela Merkel fail to achieve a working majority, will result in another volatile move in the US dollar, this time in the opposite direction!!
By Anna Coulling