U.S. Dollar Buyers Not Giving Up

Includes: ERO
by: FXstreet

Risk seeking trades were the triumphant strategies last Friday, with the S&P 500 closing +0.5% and the EUR/USD bouncing vigorously from the 1.30 handle. Despite that the December NFP number was in line with consensus, it fell short from the higher 'whisper' number after the strong number in the ADP employment the day before. The non-manufacturing ISM report had been supportive of the risk rally in the U.S. too, exceeding expectations from 54.7 to 56.1.

As NAB notes:

"Friday's U.S. employment report conformed to expectations in most respects, overall non-farm payrolls adding 155k with minor upward revisions to the prior two months. The unemployment rate ticked up to 7.8% vs. 7.7% expected, with the November reading also now 7.8% vs. 7.7% originally reported. Average hourly earnings were 2.1% up on a year ago up from 1.9% in November and back to their best levels of the past 12 months while average weekly hours rose to 34.5 from 34.4."

The U.S. Dollar had been recently well bid into the new year as the mere consideration of some Fed members to end QE3 before year-end saw some wild repositioning in the market during the first week of thin trading. According to Kathy Lien, co-founder at BKAssetManagement: "While the Federal Reserve is not expected to make a decision about ending QE3 for at least next 4 to 6 months, the fact that they are even considering terminating QE3 in 2013 is in our opinion, a game changer for the USD..."

Kathy thinks that going forward, investors will start to pay increasing attention to the U.S. economic releases. The analyst believes that if improved fundamentals keep up, the possibility of an end to QE may be taken more seriously. As a result, "we expect U.S. economic reports to have an increased importance to the greenback, which means larger volatility," she says.

So what can we expect in the EUR/USD this week? Near-term, institutions like UBS expect the recent 1.27-1.33 range in EUR/USD to keep holding for now. "Only when Madrid does apply for a bail-out and the ECB commits to more aggressive balance sheet expansion should euro bears start putting on structural short positions," the bank said.

Drilling down into the realistic 1.27-1.33 projections from UBS, a EUR/USD recovery above 1.3150, according to Marc Chandler, global head of currency strategy at BBH, may expose a retest of 1.33, failure to break on January 2.

As Marc notes:

"The fact that the euro held the $1.2980-$1.3000 area post NFP is important as it corresponds to retracement objectives and the 50-day moving average. The bounce before market's close on Friday was also constructive, which enhances the chances that EUR/USD is giving a false sell signal, generated by the sharp losses in a few days. Recovery past the $1.3115, would strengthen our confidence and a move above $1.3150 would set up for another test on the $1.33 area."

Meanwhile, Sean Lee, founder at FXWW, warns of solid EUR/USD selling orders near 1.3160/75, suggesting it should be toppy around that level. The analyst tips that the orders are from last week, adding that "when orders don't get cancelled on a Friday night it's usually a sign that the sellers are quite committed..." Sean confirms that dealers from two major banks are also suggesting sellers are quite solid near 1.3160/75. If bearish the EUR/USD, that could be a good entry level, he said.

Valeria Bednarik, in-house technical analyst, also gives her take on the pair, saying that while the lower chart shows price above 20 SMA and momentum heading higher, "bigger time frames show indicators barely beginning to correct extreme oversold readings." Under the current picture, she sees the pair short term bullish, although "the longer view has turned bearish with 1.3150 now as key level to watch in case of the recoveries..." Failure at 1.3150 "may drive the pair sub 1.30," she adds.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.