Threat of Credit Rating Cut Weakens U.S. Dollar

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A weaker U.S. Dollar is sending most currencies and strategic commodities higher on Tuesday ahead of the Fed’s two-day meeting which starts tomorrow. Speculation that the central bank will announce the start of another bond-buying stimulus program to boost the economy is one of the driving forces behind its decline. 

Additional pressure is being exerted on the Greenback after Moody’s Investors Service said theU.S.is facing a ratings cut from Aaa if it doesn’t reduce its ratio of debt to gross domestic product. Furthermore, news that a German constitutional court is going to proceed with a ruling on the country’s ability to implement the European Stability Mechanism (ESM) bailout fund is also underpinning the Euro.

 

The negatives are beginning to pile up against the Dollar indicating a significant shift in sentiment may be taking place especially since the record number of shorts in the Euro has been drastically reduced over the last 40 days. To recap, the key issues weighing against the dollar include a softer tone from the Fed, diminishing risk inEuropeand the possibility of a credit rating downgrade. 

Technically, the EUR/USD is nearing a potential resistance area at 1.2934. This price represents a Fibonacci or 61.8% retracement of the February to July break. New support has been established at 1.2763. 

The weaker dollar is also helping to send the British Pound to its highest level since May 15. It looks as if strong momentum could drive this market higher over the near-term as traders appear to have set their sites on the April 30 top at 1.6301. 

One key factor driving the GBP/USD higher is a report showing the U.K.trade deficit shrank in July amid stronger exports. This is another sign that the combination of government austerity and central bank stimulus is helping the country emerge from its recession. 

Short-term overbought conditions and over-valued prices could be helping to keep a lid on December Gold prices today. Last week gold soared to its highest level since February 29 in anticipation of additional stimulus from the U.S. Federal Reserve. This week traders seem to be focusing on the currency markets while holding gold prices in check as they await the latest news from the Fed. 

Last week’s rally has created the possibility of expanded volatility due to the size of the recent trading range. Upside potential is $1800.90 while support is at $1699.86. 

The weaker dollar and the anticipation of a possible drawdown in oil stocks when this week’s oil inventory report is released on Wednesday are helping to underpin the market. The short-term range is $94.28 to $98.60. Today’s trading action is on the bullish side of the mid-point of this range indicating a slight bias to the upside. 

There is a bearish divergence developing but this won’t be confirmed unless the bottom at $94.28 is violated while a move through $98.60 will negate the pattern. 

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About:FX Empire Analyst - James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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