USD Reverses Trend as Market Sentiment Shifts

This week has started with market sentiment turning to risk aversion mood and such sentiment may remain for the rest of the week. This can be both positive and negative for the US currency.

We were seeing some time optimistic mood on markets for some time as the global economy was recovering from the recession, commodity prices going higher and overall picture of the global economy looked nice and fine. And now all of the sudden we are seeing how quickly markets can turn their sentiment from optimism to pessimism. But such change looks not that sudden if we consider that the problems in the various countries haven’t gone away just because there were less talks about them.

Europe again has come to the fore with the question of a bailout for yet another country, this time Portugal. And again an aid isn’t certain. That’s not surprising, considering that almost every member of the European Union has reasons to oppose bailouts, just for different reasons. The nations with healthy economies don’t want to pay for others’ “sins”, while the citizens of the indebted countries don’t want to suffer from tightening measures.

Even more bothering is that countries, that provided excuse for the optimism about the global economy, now also give reasons to worry. While the US had problems with the employment and the housing market for some time, general state of the nation’s economy looked good. The revision of the US credit rating outlook from stable to negative by Standard & Poor’s reminded us that the country has the huge debt and the big trade deficit – and that’s definitely not signs of a good economy. China continues its attempts to rein its impressive economic growth, reducing good faith in the Asian economy and its ability to support the global recovery.

So where the US currency stands in such circumstances? As market sentiment shifts, so the greenback reverses its trend against other currencies. While in past weeks the dollar was weaker against commodity currencies, now it’s expected to perform better against them but weaken against safer currencies, like the Japanese yen and the Swiss franc. And, of course, the fundamentals don’t promise anything good for the euro.

In the longer-term all these can change, of course. The commodity currencies can regain strength if the global recovery would continue, the role of the dollar and the yen as safe currencies may be revaluated if the state of the US and Japanese economies would deteriorate. But for now markets stand in risk-off mode and the dollar remains safe currency. Just pay attention to the news and watch when the mood will change.

For this week we can expect decline of EUR/USD and USD/JPY. Forex Crunch defined the trading ranges in this manner:

EUR/USD can potentially go down to the level of 1.4030 from which it has started its rally, The currency pair may encounter resistance at 1.4520, the high of the rally.

The level of 80.90 provided supported for USD/JPY in the previous instances and can do so now. The two previous levels of resistance (83.40 and 84.00) can limit the currency pair’s run to the upside. 85.50 proved to provide strong resistance, but it looks unreachable in the course of this week (in the unpredictable world of Forex that doesn’t mean that the currency pair can’t run to this level, surprising everybody).

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