Forex: The Dollar Joins Risk Appetite On U.S. Strong Data; EUR/USD Closes At 1.3000

Includes: FXE, UDN, UUP
by: FXstreet

Another winning day for the Dollar in other clue that the Greenback is becoming a pro-risk trade. The USD was fueled by the strong employment data in the US and, contrary to the last year's negative correlation between equities and Dollar, the USD rose alongside Wall Street.

As the analyst Valeria Bednarik said in a recent article, "the inverted correlation has been a rule of thumb for traders particularly with the release of big figures, such as US NFP today. But the up beating numbers in the United States saw market "reacting exactly the opposite. Stocks gained along with dollar."

Friday, the Dollar soared against most competitors and the EUR/USD was dragged below the 1.3000 level to a fresh 3-month low of 1.2955. But the pair managed to recover some ground to close at 1.3000, 0.80% down on the day. In equities, Wall Street closed a historical week, with the Dow reaching a new all-time high at 14,413.17, and the S&P 500 extending its winning run to 6th session and posting 2% weekly gains.

Early in the day, the US government reported the US economy added 236,000 new jobs, against 160,000 expected, while the unemployment rate fell to 7.7%, 5-year low. In Germany, the news wasn't good as industrial production contracted 1.3% in January from the same month in 2012. As 59% of the goods made in Germany go to European countries, the Teutonic nation is drinking some effects of its own austerity medicine in countries such as Italy, Greece and Spain.

Later on the day, Fitch Rating decided to downgrade Italy's rating to 'BBB+' from 'A-', citing the inconclusive results of the Italian parliamentary elections and deeper recession as the main reasons. Fitch took five extra days to publish its decision despite the rumor spread the market on Monday. Outlook remains negative.

So, good news in America vs. bad news in Europe is on the table. If players decide to trade economic growth and ignore drama headlines, "then the natural outcome will be further dollar strength," points Bednarik.

UK and the EU are still far from the exit route as Draghi said last week. But "investors now believe the US economic engines are working for good," Bednarik states.

What to do with a weak Euro?

With a EUR/USD still above the 1.2960 strong support, the bearish scoop is not conclusive. According to Yohay Elam, ForexCrunch's analyst, the EUR/USD failed to break triple at 1.2960 bottom despite Italian downgrade. "In the past two Fridays, EUR/USD twice fell below important levels: 1.3170 and 1.30, but eventually closed above these lines, comments Elam. "The continuation was seen only afterwards."

Technically, the bearish pressure has increased on the cross, however, the EUR/USD could see some consolidation before another leg lower. As for the short term, a breach of 1.2956 (low Mar.8) would open the door to 1.2929 (low Dec.11) and then 1.2881 (low Dec.10). On the flip side, resistance levels align at 1.3055 (MA200h) en route to 1.3135 (high Mar.8) and finally 1.3163 (high Feb.28).

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"Although the immediate impact today (of NFP) has been a firmer greenback, the encouraging news should help market sentiment heading into next week," says Nick Bennenbroek, Head of Currency Strategy at Wells Fargo Bank. "We believe that could support a steady to slightly stronger trend for commodity and emerging currencies against the U.S. dollar, but we expect further losses in the euro, yen and pound."

In this line, Camilla Sutton, Chief Currency Strategist at Scotiabank, commented, "from the ECB's point of view the economic recovery in the later part of 2013 is based on an increase in world demand (exports), loose monetary policy and less fragmentation. We would suggest that this recovery strategy requires a weak EUR." Accordingly, Scotiabank expects "that any rise in EUR back towards its February level of 1.35 will generate angst at the ECB. We hold a year-end EUR forecast of 1.27."

The week ahead:

A second-tier euro docket lies ahead on Monday, as Germany would release its trade balance results, followed by a measure of the French Industrial Production ahead of Italian, Greek and Portuguese GDP figures for the last three months of 2012.

The rest of the week, the BoJ minutes will provide some clues on the Kuroda government, the SNB and the RBNZ will decide their monetary policy, the US and Germany will publish their CPI, and a new release of the retail sales in the United States will catch the investor's attention.

Most important events:

- US retail Sales
- England NIESR GDP Estimate
- England Industrial Production
- BoJ Monetary Policy Meeting Minutes
- US Inflation

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.