The hammer candle of two weeks ago on the dollar index chart, duly delivered the expected bounce for the dollar, which closed Friday’s trading session with a narrow spread up candle and ended the week at 78.44, but still well below the shorter term moving averages. Indeed with the 9 week moving average now crossing below the 14 week, this has added further bearish sentiment to an already gloomy picture for the dollar.
Moving to the daily chart, this morning’s early trading session saw the dollar move firmly higher on the index, only to run into resistance from both the 100 and 40 day moving averages, which now sit immediately ahead, and if last week’s mini rally is to continue then we will need to see a break and hold above both these key levels, at 78.16 and 79.00 respectively, if the USD index is to continue to gain over the next few days. However, given today’s price action in the US session, the current picture remains bearish, and should the session close this evening with a shooting star candle, then we can expect to a pullback from this level in due course. Ahead of course, we also have a deep level of resistance which extends from the 79 area, right through to the 81.31 region where the 200 day moving average now also sits, and only a dramatic change in market sentiment is likely to see the dollar climb higher over the next few weeks.
One such trigger could of course be further problems in the Eurozone, as the markets become increasingly frustrated at the lack of progress on the EFSF stabilization fund and any firm agreement on this key issue. The EU ministers are meeting once again this week for a scheduled meeting, where this issue will once again take centre stage, but with Germany refusing to allow an expansion of the fund or purchase of peripheral government debt in the secondary market, agreement once again seems unlikely, raising once more the prospect of an ECB bail out, should Portugal or Spain default on their loans. This now seems increasingly likely given the fact that Portuguese bonds reached an all time high last week, breaching the target level set by Lisbon.Whilst these negotiations may ultimately provide a solution, the forex markets seem resigned to further lukewarm words, and the debt restructuring which will inevitably arrive at some point soon.