Since the beginning of September the US Dollar (NYSEARCA:UUP) - bullish, (NYSEARCA:UDN) - bearish, has broken out of a trading range after hitting rock bottom in March of this year. The breakout would have happened earlier but the continued haggling in Washington, D.C., over the debt ceiling and the budget deficit made investors stop and take notice.
After a solid run higher the US Dollar has run into some significant technical and fundamental resistance. On a technical basis the 200-week moving average is proving to be a barrier. Since bursting through last week we pulled back to the 50-week moving average and have bounced off that level.
The largest fear in Europe was a systemic collapse based on a potential Greek default. The recent stress tests did little to inspire confidence and the $2 billion dollar loss by UBS from the pegging of the Swiss Franc to the Euro has caused trading desks across Europe avoid risk like the plague.
The recent failures of Dexia and Proton Bank should signal a warning sign to investors that all is not all right in the European financial system.
This coming weekend the EU will hold a summit with a band aid plan to help Greece and the ailing banking sector.
Once this crisis moves to the side, which the currency markets may already be anticipating; Washington, D.C., takes center stage. The deficit committee negotiations have been going slow and with the deadline approaching the markets will be watching for any news on possible breakthroughs.
In the event that no agreement is reached before the November 23, deadline automatic cuts will be triggered in programs beginning in 2013.
In the month ahead expect increasing chatter about the budget cuts similar to how the chatter increased ahead of the debt ceiling negotiations. As earnings season draws to a close over the next few weeks we may see increased pressure on the US Dollar as the focus temporarily turns away from Europe toward the United States.
Stories will begin to fly about how the budget cuts, which amount to 10% of the budget deficit over the next 10 years if current numbers hold, will push the US economy back into a recession.
The next week should be crucial as the US Dollar has pulled back to a support level on the daily and weekly charts. If we cannot move above the highs made earlier this month expect a retest of the summer and possibly May lows as the deadline draws closer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.