The Dollar Fights Back!

This week has been for sure one of the most volatile and eventful ones for some time now! Euro has staged an impressive 1300 points rally only to find a temporary stop at 1.4720 after it was clear that the “bosses” of ECB did not wish to see it rallying any further! The announcement came yesterday across the wires that ECB decided to lower its deposit rate by 100 bps in order to help lending between the banks. This move came on the back of serious euro appreciation, which saw EUR/USD climbing to the upside in dangerous speed. In the aftermath of the release, the pair lost all its gains and even dropped lower towards 1.42.

The euro correction is underway since yesterday and at the time of writing EUR/USD has fallen to new daily lows below 1.40. The fact that oil dropped below 40 dollars per barrel also is helping dollar appreciating and it will be interesting to see if the dollar continues its rally ahead of Christmas holidays. 

Today the economic calendar is empty from important releases and therefore traders may take the upportunity and close their positions ahead of the weekend. So far dollar is strong across the board and there is a sentiment amongst traders that the aggressive move we saw in the euro was likely to be contained for now as it is obvious that ECB is not keen on watching its currency skyrocketing towards 1.50 at this moment in time! After yesterday’s sudden move by Trichet and his pals’ to lower rates, traders speculate that the bank may pause its rates after all and eventually ease further in the coming months.

EUR/USD is trading on the defensive since yesterday and the next level to watch for now is 1.39 ahead of 1.3870. If the later level gives way, the pair is likely to head south towards 1.37 which is the 50% retracement from the recent rally we saw this week. The daily chart shows that there might be further downside next week and especially if the pair closes below 1.40.
At the beginning of next week the markets are half operating therefore we might see thin trading conditions all across the board. Beware, as only a few players will be participating in the markets making trading quite volatile. The dollar might continue to be under pressure as more economic data might show further slowing in the economy, however come January and we might see the greenback strengthening again especially against the euro, as historically the first month of the year starts with dollar strength!