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Dollar Back to its Strength?

Global markets remain near record highs, but the currency market shifts to a cautious trading tone ahead of the Fed’s midweek meeting.

EURUSD, the world’s most actively traded currency pair, retreated into the 1.2100 area on Friday night. We note how, for the second time this year, the EURUSD has lost its impulse growth at 1.2200, and we see an intensification of selling on the growth.

Dollar back to its strength?

Right now, EURUSD is trading near the 50-day moving average. A bounce up from this level would suggest that the upside trend in the pair will continue. A fall below, however, would make the pair consider a break in the rising trend. The next major support is at 1.2000. It is not only a significant round level for the pair, but it is also crossed by the 200 SMA, which often separates the long-term rising and falling trends.

False breaks, like the one that happened in March, sometimes occur, but most of the time, its signals are correct, repeatedly identifying reversals in the previous years.

Also worth noting is the indecisiveness of the dollar bears. We have noticed that in the history of the European currency, the EURUSD slips to 1.2000, like this year, preceding pullbacks and keeping the pair in the area in recent ranges. A decisive breakout indicates the seriousness of the intention to move into the next one.

Dollar back to its strength?

And here, it is essential to realise that this week’s FOMC meeting looks set to determine the dollar’s direction. Last week the ECB signalled its willingness to maintain its intensely loose monetary policy. If the Fed repeats its signal, we could see a new impulse for dollar easing, which would reinstate the rising trend in shares and most currencies against the USD.

Signals of willingness to roll back QE will start a new cycle in the USD where it will be king until the other central banks follow suit. History suggests that signals of a reversal at the Fed from easing to tightening could be followed by about six months of dollar appreciation, which hits emerging market currencies hardest.

On the fundamental analysis side and the Fed’s understanding of the importance of low rates in the US to fund economic support programmes, the dollar looks vulnerable. But recent currency market signals shows that there is much more willing to hear tapering talks and the start of a growth cycle for the dollar. However, if the Fed remains soft, it will be a real surprise to the markets, capable of triggering a big move for many weeks and months to come.

Source: FXPro

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