At the best of times, movements in the forex markets are notoriously difficult to explain, much less predict, and last year was a particularly difficult, as forex traders tried to interpret conflicting and incoherent macro economic decisions from around the world. Leading the way of course was Europe, with it’s raft of sovereign debt issues with hugely indebted peripheral members such as Portugal, Greece, Ireland and Spain all adding the burden that is now almost single handedly fallen onto German shoulders. For example the euro dollar fell from 1.45 to 1.20 in the first half of 2010, only to rise again to over 1.40 in November, before briefly dropping below 1.30 once again as the threat of contagion weighed heavily, only for this to recede once again. Today’s price action was just as difficult with the Portuguese bond auction relatively well bid, which initially sparked a fall in the euro, before reversing sharply and surging higher for the remainder of the day.

Technically the outlook for the euro vs dollar remains firmly negative, with the bearish engulfing candle of last week giving a clear signal of future market direction for the pair, and indeed in late trading this evening the pair appear to have run into resistance at the 9 and 14 day moving averages. This area also combines with some deep price congestion created during the sideways consolidation of December, and these factors should combine over the next few days to cap any further rally higher.

The US market last year was dominated by the obscure policies of the FED, which included quantitative easing, tax cuts now with a balanced budget later, and the expansion of welfare schemes, which ¬†Europe simply saw as designed to weaken the dollar, devaluation by another name. Since then the dollar had recovered from the lows of early November on the dollar index daily chart, and despite today’s wide spread down candle, the longer term outlook for the US dollar remains firmly bullish.

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