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I think we have a situation where the rally should be thought of as an opportunity to pick up “cheap US dollars.”
The euro took off Friday as we continue to see a lot of noise around the parity level. By doing so, the market looks as if we are going to continue to see this market as one that is trying to break down through parity, and if and when we finally do that, it’s likely that we will see a significant move lower. The algorithms are typically tripped when you get a daily close below parity, so it’ll be interesting to see how this plays out. That being said, the market is likely to see a lot of negativity, but we might get a short-term bounce. In fact, that’s exactly what I’m expecting in the short term.
Looking at this chart, it’s likely that we could go to the 1.02 level above, which is very noisy and it could cause a little bit of trouble. If we break above there, then it’s likely that we go to the 1.04 level. The 1.04 level was previous support, so “market memory” could come into the picture and show signs of hesitation. With that being the case, I’d be a seller there as well. As soon as we see signs of exhaustion after the rally, I think it suggests that we are going to start selling off again.
Keep in mind that the Federal Reserve is currently doing everything it can to tighten the market, and as long as that’s going to continue to be the case, a tight monetary policy will drive the US dollar higher. On the other side of the Atlantic, you have the ECB which is going to have a small interest rate hike or two, but after that point in time it’s very likely that we would see the ECB turn around and give up trying to raise rates considering that the EU economy is struggling. Furthermore, with the lack of energy, it could cause major issues down the road, so I think the ECB is essentially handcuffed.
This does not necessarily mean that we are going to collapse anytime soon, just that the market will more likely than not continue to fade rallies. Because of this, I think we have a situation where the rally should be thought of as an opportunity to pick up “cheap US dollars.” The Federal Reserve is going to remain much more aggressive and tight than the ECB.
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