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Dollar Rally Slows, Waiting for the Fed

Posted by Joseph Trevisani on Jul 23, 2015 1:31:00 PM

This month's dollar's rally against the euro has given back about half its progress in the last three days as Greece has acquiesced to European austerity demands and next week's Federal Reserve meeting promises little clarity on a September hike.

The dollar had gained 3.8 percent against its European counterpart in just under three weeks, from the beginning of the month until Monday's close. But in the three trading days since traders have reversed almost half those improvements, taking back 1.7 percent, leaving the greenback with about a 2 percent advance for the month.

The long term falling euro trend, shedding 25 percent against the dollar from 1.3993 in May last year to 1.0458 in mid-March was largely based on the diverging central bank rate policies. The ECB embarking on its quantities easing program and the Fed ending its own and then publically contemplating the first Fed Funds rate hike in eight years.

Profit taking on that decline was moderate, bringing the euro back to about an 18 percent drop at 1.1467 on May 15th. 

The revival of the Greek debt drama with the election of Syriza and Prime Minister Alexis Tsipras in January aided the dollar both on the way down to the March low and by restraining the recovery which did not reach the first major Fibonacci level (38.2 percent, 1.1808) before faltering.  

Even Greece’s apparent initial agreement with her creditors will likely act as a drag on any potential euro resurgence as a final three year bailout has still to be negotiated and monitoring of the terms of the agreement by the Troika inspectors will resume shortly. 

In the immediate background and also driving the dollar higher in the run-up to the Fed’s July 29th meeting, is the possibility that the FOMC will begin its long promised rate cycle.  

The market is almost evenly split on the potential for a September hike, with U.S. futures contracts showing about a 48 percent likelihood that the Fed will raise its benchmark Fed Fund's rate by 0.25 percent in September and an 82 percent chance of a December increase, the second percentage assuming of course, there is no hike in October. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

eur july 23

 

 

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