Dollar Index Set to Keep Climbing With ECB Hike Priced-In

by DailyFX

The Dow Jones FXCM Dollar Index (ticker: USDollar) added another day of gains to its recent multi-day run of gains off recent lows by 9550 which came as the index bounced off rising trend line support off early May lows. The current range bound trade suggests that the index will continue to rise back above 9700 toward 9750 and its most recent lower high. This is where things turn interesting, the series of lower highs dating back to early March have thus far done a good job of containing any move higher and it could well be that the index will fail to take out the 4th lower high and continue its lose downward trend. If the index does manage to take out the 4th lower high at 9750 only 20-ticks high up is the corrective May high resistance level at 9770 making a break above both these resistance level somewhat unlikely at this juncture.

However, with that said and done we do believe that today’s ECB rate decision will in fact be dollar positive. Firstly, the anticipated rate hike is largely priced into the market after ECB President Trichet used revealing language at the previous meeting and any indication that further hikes are far down the round will be euro negative (ie USD positive). Secondly, despite widening yield differentials the euro has been unable to mount any kind of serious assault against the buck due to its ongoing, and seemingly unending, debt crisis. Thirdly, recent data out of the EMU has been anything but positive, in fact it has been quite worrying with PMI services and manufacturing numbers slowing significantly in recent months as a ‘soft patch’ takes hold. Fourth, the ECB is at risk of appearing out of touch from it economy as it continues to raise rates despite slowing growth and pundits may punish them for this action. Fifth, when all is said and done the US economy is certainly not in tip-top shape but when compared to the euro-region it does look the stronger of the two and as such we believe that at the very least the index should continue to climb today and potentially test the lower tops and May resistance and in a best case scenario the index will break out of recent ranges to mount a serious comeback rally toward the 10,000 level.

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