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25/09/2014: Dollar strength is the big driver once more

The forex markets have been the big focus this morning. Renewed dollar strength has come in the past 24 hours. The Dollar Index is almost half a percent higher (a big move in forex terms) on the day and is back to a 4 year high and levels not seen since June 2010.

DXY   25092014

This move has been driven by three factors:

  • The huge increase in New Home Sales in the US. The figure jumped by 18% to 504,000 which smashed expectations of 430,000. The US housing market data has been positive in recent months and continues to paint a picture of an improving US economic recovery. This is driving dollar strength
  • Mario Draghi has commented that the ECB stands ready to use additional unconventional monetary easing in an attempt to control falling inflation. This has driven euro weakness.
  • President Xi Jinping is potentially looking to replace the head of the People’s Bank of China. This has led to speculation that China may be looking to engage more stimulus.

Subsequently, the euro has dipped by 60 pips in the European session. Furthermore, other major pairs have moved with the positive dollar, with Cable down 40 pips and Dollar/Yen is 20 pips higher. It appears as though the retracements that were threatening throughout the early part of the week are quickly being wiped out.

The other impact is that the precious metals are suffering again, with both gold and silver just under a percentage point lower. Gold has dipped to its lowest since 2nd January today and although the initial target remains $1200, there is little reason to suspect that it will not retreat to test $1184.50. Even intraday rallies should be seen as a chance to sell. Silver also remains incredibly weak and is eyeing a test of the Monday low at $17.30. The price is testing support levels from July 2010 and continues towards the descending triangle implied target of $16.70.

The European equity markets have had a mixed showing today, with both the DAX and CAC benefiting from Mario Draghi’s dovish comments. The DAX has been especially volatile in the past few days an the outlook is becoming messy again. However trading back above 9600 is encouraging again, but the move needs to push above the historic pivot level at 9800 to suggest the bulls are regaining control. The CAC is more negative than the DAX, having formed a top pattern recently. However the higher the recovery moves above the historic pivot at 4400, the more encouraged the bulls will become.

Wall Street futures are called lower with the S&P 500 expected to open around 1 point down. However, both the Durable Goods Orders and Weekly Jobless Claims are released at 13:30BST before the open and this could have an impact. The Durable Goods are expected to bounce back by 0.6% but the number has been under pressure in recent months and this would be a welcome improvement. The weekly jobless claims are expected to remain below 300,000 and come in at 294,000 and any improvement on this figure could helpt o drive the dollar strength into the afternoon. The 4 week moving average dipped back below 300,000 last week to 299,500 and any number which is again below that will be considered to be a positive.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.