The Buck Stops Here

Now What?

There are no important data releases in the days ahead. Barring significant surprises then, the environment is conducive for dollar consolidation.

In terms of technical indicators, I would point out that the moving average convergence-divergence has crossed to the upside for the euro, a constructive development. There are also minor (bullish) divergences appearing on the relative-strength index. The violations of short-term downtrend lines are also consistent with this view.

From a pattern-recognition vantage point, the euro looks to have recorded a potential double-bottom and is now through the neckline near $1.2150. The measuring objective warns of risk toward $1.2250. A couple of other levels come in near there. The 61.8% retracement of the euro's slide since the June 8 high near $1.2317 is near $1.2225.

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The 20-day moving average, which is often used as the midpoint of Bollinger Bands, comes just below $1.2300 currently. The euro has not traded above its 20-day moving average since early May and has not closed above it since April 25.

Although sterling appeared to lead the initial move in the dollar's correction, market positioning warns that it is likely to lag the euro and Swiss franc during the consolidation phase. That said, the initial target for sterling comes in near $1.8360 and then $1.8500.

If market participants conclude that rather than a significant reversal of the dollar, the recent price action is suggestive of a (range) trading affair, there may be renewed interest in the higher-yielding currencies; not only the Australian and New Zealand dollars, but even renewed interest in the Brazilian real, despite the unfolding political scandal, the Mexican peso and the South African rand.

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years. He has worked at economic consulting firms and at global investment banks. Most recently, Marc was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. In September 2004, Chandler started a financial consulting firm, Terra K Partners, LLC. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.