U.S. Economy Improves; Dollar Fundamentals Improving

James A. Hyerczyk Posted 04 June 2008 @ 05:59 pm EST

The Euro continued to reel following comments earlier in the week by Fed Chairman Bernanke. Not only did Bernanke state that the Fed was "attentive" to the level of the U.S. Dollar, he has also come out to say that the rise in inflation is a "significant concern" for the central bank. These statements are sending signals to the Forex markets that the Fed is going to take a hawkish attitude toward interest rates and the Dollar. Traders are becoming more and more convinced that the Fed is finished cutting rates and that the markets should look forward to an upward rate adjustment by December. Rarely does the Fed offer any commentary on the Dollar so Forex traders are taking his words seriously. The Fed is on the same page as the Treasury, which is the guardian of the U.S. Dollar. Earlier in the week, Treasury Secretary Paulson stated that he supported a stronger Dollar. The fundamentals are getting bullish for the Dollar and traders should treat these comments as a commitment to a stronger Dollar over the long run. In a report issued on Wednesday, the ISM grew in May at a pace greater than expected. In addition, ADP Employer Services reported that U.S. companies added 40,000 jobs in May and revised the April figure up by 13,000. Experts had been forecasting a decline by as much as 30,000. Although these two reports are perceived as bullish surprises, all eyes will be focused on Friday's U.S. unemployment report. This report could put the final nail in the coffin of the Euro. The European Central Bank meets on June 5. Traders are expecting the ECB to keep rates at 4%. Although the Fed’s comments should attract more selling, trading may become more subdued until after the ECB's meeting. Technically, the Euro is in a position to break a major uptrend line. If this occurs, then look for it to challenge the May 8 bottom at 1.5283. On the upside, look for sellers at 1.5538. England to Leave Rates Unchanged; Economy Showing Signs of Stagflation The Bank of England will keep rates at 5% at its next meeting on June 5 despite an extremely weak housing industry and lower consumer confidence. Normally this type of situation would call for a decrease in rates to stimulate the economy. The BoE is unable to cut rates at this time due to the rise in inflation. Traders are beginning to think that the BoE is going to let the economy weaken to a point where it counteracts the effects of inflation. Only at that level, some believe, will the economy begin to stabilize. The GBP/USD has been trading inside of a 1.9362 to 1.9852 range with retracement points at 1.9607 and 1.9549. Weakness is developing because this support could not hold. The next downside target is 1.9512. Stock Market has to Stabilize to Support USD/CHF The USD/CHF traders are waiting for a clearer signal that the stock market has bottomed before rallying. Traders are not willing to commit to the long side until the problems in the financial sector becomes stabilized. With the Dollar's fundamentals getting stronger, all it is going to take is a little good news from the stock market to launch a strong rally. Technically, the market is ping-ponging between a pair of trend lines. On the upside, look for resistance at 1.0465. Support is at 1.0277. With a bias to the upside, look for a strong breakout rally through this price to 1.0630.

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