Contraction in Economy Slowing Creates Bullishness for U.S. Dollar

By: BrewerFX

The Fed ended much of the uncertainty in the Forex markets today when it announced that its key lending rate would stay between 0 - .25%, and there would be no additional expansion of its balance sheet through the purchases of government assets and mortgages.

Although it did not set a hard calendar date for a hike in interest rates, refraining from additional purchases of assets sent a signal to the markets that it would allow yields to rise.  This scenario created the bullishness in the Dollar after the FOMC meeting.

Traders were expressing their desire for an improvement in the interest rate differential which countered any buying from traders seeking more risky assets.

The Fed also commented that the contraction in the economy was slowing.  This provided additional support.  Gains may have been limited as the Fed reported that inflation was expected to remain low.

The EUR USD failed in its attempt to break out over 1.4177.  This move would have turned the main trend to up.  Instead, the daily closing price reversal top indicates that the selling is greater than the buying over 1.4100. 

If downside momentum can build, then look for this market to attack the last main bottom at 1.3748 over the near term, on its way to the first major objective at 1.3610.

The current lower-top, lower-bottom formation is still the best indication that the EUR USD wants to move lower. 

Down side pressure may also build because some traders feel that the European Central Bank would rather not see prices above 1.4100.  At this level, some trades feel that the high price will have a negative impact on Euro Zone exports.

Continue to look for downside pressure as long as 1.4177 holds as resistance.  This scenario will not last long, however, if this currency pair fails to break through the last main bottom at 1.3748.

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