The main reasons for dollar strength were firstly the fact that last week was the end of the month and many traders were closing their long euro positions in order to take the monthly profits. Also, the fact that FED officials signaled a further cut in December, seemed to work in dollars favor this time, as market believed that the FED is taking some action against recession.
Whatever the reasons, the euro remained weak and still today Monday, EUR/USD, although retraced briefly to 1.47, found sellers once again taking the pair to important support at 1.4625. Only a clear break of this level will jeopardize euros strength, as next target will be 1.45. So far, it seems that 1.45 will come sooner than 1.50 but lets wait until this weeks data come, as we have non farm payrolls and ECB rate decision.
Today, EUR/USD is trading within 1.4625-1.47 range and only a clear break of these levels might give us further signal as to what the pair's next move will be. The only economic news from the US today is ISM Manufacturing which is expected to be stronger than previous month.
This week is very important for dollars fate, as not only we have Trichet speaking in a press conference regarding rates, but we also have the very important payroll data which will help markets assess how bad things are in the American economy. Most analysts expect ECB to leave rates unchanged; however it will be very interesting to hear what the bank will do regarding rates in the next year.
With euro at such high levels and the risks of economic growth slowing, we might hear Trichet downplaying further rate hikes for at least a few months. Some analysts predict that the bank will have to start easing rates next year, if the economic data from Europe continue to disappoint. Therefore, with these events all unfolding, we might eventually see euro crushing from the high levels and return to 1.40 in the coming months.
Let's not forget though that historically the month of December is usually negative for the dollar as it's the end of the year and traders tend to sell the American currency. This time things might be even worse as the economic outlook seems negative and there are more reasons for dollar bears to keep on selling the greenback. However, usually New Year tends to start with dollar strength and if EUR/USD makes another quick go at 1.50, the move might be reversed with the start of the New Year!
Let's wait and see what this week brings us and if the greenback manages to sustain the recent gains against the euro and if we manage see 1.45â€¦