The dollar finally made significant headway through Tuesday’s session; but should we treat this as a definitive turn for the world’s most liquid currency? At face value, the move was pretty impressive. The greenback closed its biggest advance since August 7th and topped highs not tested in two weeks. More importantly, for most of the majors, this rally was significant enough to ward off the threat of an imminent and absolute breakdown for the battered currency.
However, does this really mean the dollar has been put on pace for a long-term recovery? Unlikely. Thin liquidity has leveraged volatility for a few weeks now; and the tight ranges that the majors have held demanded a break sooner or later. In essence, the dollar’s rally was the path of least resistance as it doesn’t by its nature purport the development of a new trend. This is perhaps better read through technicals. Despite EURUSD’s sharp decline today, the pair is still holding to the rising trend channel that has developed a mild, bullish bias since mid-June.
On the other hand, should the dollar take up the cause of risk aversion; then today’s developments could hold a greater meaning in terms of long-term trend. It isn’t a stretch to suggest that over the past few months that sentiment has run awry of fundamentals. What’s more, this is not an obscure consensus. Whereas the markets could have been considered severely depressed following the panic selling during the worst of the financial crisis; a subsequent balancing of sentiment doesn’t naturally lead to a long-term bull trend. Eventually, the recapitalization of the markets (with sidelined money) will taper off and the demand for return will naturally look to tangible fundamental trends for actual growth. It is this equivocal disparity that has slowed the market’s progression and will no doubt lead to its eventual correction. Yet, we are still burdened for a catalyst to such a move.
Being the largest economy in the world, it is natural to presume economic trends will stand as a proxy for the entire globe; and therefore, US data would have a greater influence on price action. In this capacity, today’s data didn’t have the sway to set the pace for a strong economic recovery or double dip recession. Nonetheless, it has refined the outlook. The August ISM manufacturing was the top market mover for the US session; and the data certainly contributed to the dollar’s strength. Already expected to report growth (a reading above 50 denotes expansion), the sector reading actually outpaced forecasts with a 52.9 reading that matched the highest reading in three years. The sixth monthly increase in pending home sales and unexpected dip in construction spending were notable but ultimately far less influential. Looking ahead, the only, single economic indicator that can be reasonably expected to carry the weight of investor sentiment on its own is Friday’s NFPs.
