Dollar Is Falling and Euro Is Bouncing – Is Fed Responsible For This?

The US economy has been on a tepid recovery after the biggest recession since World War II. Lack of strong fiscal policy response due to the divided US government has put most of the burden on the monetary policy. Federal Reserve under Chairman Ben Bernanke has taken various steps to ameliorate the economy. Recently, in his Jackson Hole speech, Chairman strongly hinted for more policy actions and the minutes of the last FOMC meeting also fueled the expectation of a QE3. The speculation for QE3 has been going on for some time and today – September 13, 2012 – is the day of another FOMC statement and press conference and Mr. Market is expecting Chairman Bernanke to follow through on his speech. Under this background we conduct a short analysis of the dollar index and the UER/USD.

Dollar Index Continues Its Fall

Dollar index has been falling ever since it made a 15 year high of 121.29 in July 2001. Subsequently, it made an all-time low of 71.05 in April, 2008 – a 41% decline from the high. In between, it bounced off around 80, which acted as a support zone in earlier years too – in ’91, ’92 and ’95. After making the all-time low, dollar has traded within a symmetrical triangle on monthly timeframe, crisscrossing the 80-level. The center line from the projected apex of the triangle is within this zone. Dollar index is again fallen within this zone.

On weekly timeframe, the price action of the dollar index points to a downward bias. After facing resistance around 83.63 – the high made on August 23, 2010 – dollar index made a double top in May-July 2012. It broke below the neck line of the double top in late August and is now on its way to the measured target of 78.75. Whether it will stop at that or not is not clear at the moment.

The daily chart shows that dollar formed a congestion area in the first five months of 2012, mainly bounded by 80.50 and 78.50 levels. This area also includes the 50% Fibonacci retracement of the advance from the low of 73.56 made in August 2011 and the high of 84.25 made in July 2012.

Euro’s Bounce Continues

EUR/USD has had a terrible time in the first few months of 2012. However, on monthly timeframe it is maintaining a long term up trend. Note: prior to 2000, EUR/USD is constructed as a composite of euro’s various national currencies.

On weekly timeframe, EUR/USD is marching towards the downtrend line, which touches the May-2011 and the August-2011 highs, after making a Trend Channel Line Overshoot (TCLOS) chart formation and overcoming couple of strong resistance levels. Now, another resistance level is approaching – near 1.2975.

On daily timeframe, there is a confluence of resistance levels The first one is the 38.2% Fibonacci retracement of the decline from the May, 2011 high of 1.4940 to the July 2012 low of 1.2043. This is near 1.3160.

The second level is the 78.6% Fibonacci retracement of the decline from the February 2012 high of 1.3486 to the July 2012 low. This is near 1.3180.

The third resistance level is the congestion area that the pair made from February 2012 to May 2012, generally bounded by 1.3350 and 1.2990.

The fourth is by the ABCD pattern. ‘A’ is the low of 1.2624 made on January 13, 2012. ‘B’ is the high of 1.3486 made on February 23, 2012. ‘C’ is low of 1.2043 made on July 24, 2012. The projected level of ‘D’ – CD = 1.27 of AB – comes at 1.3138.

Finally the projected advance of the EUR/USD is expected to touch the downtrend line near 1.3100 levels.

The confluence of so many resistance levels makes the area around 1.3100-1.3150 to be a significant resistance level.

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