Fed Saves the Day… Again; Dollar Off Its Highs

The S&P 500 saw the year in with a whimper… Fed to the rescue.

Bullion.Directory precious metals analysis 8 January, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works

John Stuart Mill, Political Economist

John Stuart Mill summed it up perfectly, regardless of the fact he said this nearly 150 years ago.

The start of 2015 could be described as a panic, as traders head for the hills on a series of factors, whether it is Greece exit fears, central banking policies or crude. The year was off to the worst five day start..ever. If capital was plowed into productive works – not hopelessly unproductive – I would argue the equity markets could handle turmoil without being sucked into a vacuum awaiting the next Fed president to save the day.

Each time the Fed verbally talked the S&P 500 higher, after rapid contractions, price action was hovering around newly formed highs. This is suggesting that the broader equity market is vastly supported by the Fed, and the likelihood of a more troublesome correction awaits.

Like equities, the US dollar index (now at 9-year highs) is, too, finding difficulty blasting higher. I will fully admit that I underestimated the irrational exuberance behind the dollar, but price action is now butting against  an 11-year resistance barrier. I previously wrote that each time the US dollar index (largely pegged to the euro) traded above 90, price action found its way plunging back into the 70s. Will this time be different? Because “this” time is always “different.”

The dollar is finding trouble around resistance near 92.13, but this is not indicative to an immediate pullback. Central banking could help get the dollar over the hump, particularly what happens at the ECB policy meeting on January 22. It is expected that ECB President Mario Draghi will announce full-on QE. However, after following Draghi and trading the euro for some time, the decision by Draghi could disappoint the market, which is a net-negative for the dollar.

Yet, we still have a bit of time before then. If price action cannot close above resistance, or cannot create a sequence of closes, price action could see a significant pullback. The dollar is highly overbought, which is a supporting factor, but not a sole factor to short.

If the ‘ol greenback can shake current resistance, I expect the dollar to reach 93.75 with higher resistance near 96.55. Support can be found at 90.93.

 Please check out the sound dollar-related analysis posted by Terry Kinder.

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