As I wrote earlier, it’s really a hiking week for the EURUSD pair. All indicators recently are in favour of EUR. Traders are placing their bets on the European currency and may continue to do so as the interest rates differential between Europe and US is growing by the day. We are seeing the dollar weakening across the board at the moment and although this is not surprising in the aftermath of FED rate cuts and also deteriorating conditions, nevertheless, markets were not ready for such dollar losses such a short space of time.
However, there are still fundamentals pointing towards a strong USD in the near term. Beware of this bullish rally as it might be a trap.
1. The ECB is fighting a stronger euro by lowering the overnight rate. This could slow the flood of cash into the EUR by making euro deposits less attractive and would stunt the growth of the EUR/USD.
2. Commodity prices are still low overall. Oil prices are below $40 a barrel. If the USD was really losing its intrinsic value, we would have expected a rise in commodity prices not a decline.
3. Treasury yields are dropping every day. The 10 year index ($TNX) is hovering near a break of 2%. Yields are the inverse of note prices and the rise in prices for notes represents demand for safer assets and the USD needed to purchase and hold them.
4. The financial crisis is still in play. That means that currencies that act as reserves or shelters during times of uncertainty are likely to remain in demand. That includes the USD and the CHF (Swiss Franc).
Furthermore, on the technical side, we can clearly see that the pair has reached its peak and is on the way down. A bearish mood for the said pair in nearer term should be seen.
All in all, Christmas is just around the corner and let us enjoy the holiday.
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