U.S. Dollar Reverses Earlier Loss on Euro Volatility

It’s been a wild 24-hours for the U.S. Dollar. On Tuesday, the dollar posted an inside day against a basket of major currencies. The Euro, which tends to control the direction of the dollar index, posted a similar more. The inside chart pattern typically indicates investor indecision and impending volatility.

The expected volatility returned early Wednesday when the greenback fell to a three-year low against its counterparts. The spike to the downside was fueled by the Euro’s spike to the upside as investors shook of a setback to Chancellor Angela Merkel’s chances of forging a “grand coalition” in Germany.

After the initial move, volatility returned and the dollar and Euro reversed direction. Shortly before the European opening, the Euro is trading lower and the March U.S. Dollar Index is higher.

Over the long-run, the U.S. Dollar is expected to decline as market participants hold the view that monetary policies are headed for normalization across the globe. However, over the short-run, it’s still going to be subject to price swings triggered by geopolitical events.

After last week’s price surge, the Euro’s upside momentum slowed on Tuesday after news broke which suggested the European Central Bank might not tweak its monetary policy stimulus as soon as investors anticipated.

Additionally, the Euro’s gains were limited as members of the center-left Social Democrats (SPD) in one of Germany’s regions voted against talks with Merkel’s conservative Christian Democrats (CDU), stoking worries over whether she can form a “grand coalition”.

Gold

Gold futures are swinging with the movement in the U.S. Dollar, first hitting its highest level since September 11 before turning lower for the session.

All the move proves is that the uptrend is strong and that most of the move in gold is dollar-denominated. A simple turnaround in the dollar like we are seeing early Wednesday could break the gold market which has rallied for 23 sessions. Technically, the market is overbought which could lead to profit-taking.

Crude Oil

U.S. West Texas Intermediate and international-bench mark Brent crude oil posted potentially bearish closing price reversal tops on Tuesday. Although not a trend-changing event, the chart pattern could fuel the start of a 2 to 3 correction, or a 50% retracement of the recent range.

The selling started on Tuesday when an analyst at Swiss bank said a price “correction should occur … (as) hedge fund expectations for further rising prices have reached excessive levels.”

U.S. Equity Indexes

U.S. stocks broke sharply from intraday record highs on Tuesday, as investors weighed the possibility of a government shutdown. The Dow posted its biggest one-day reversal since February 10, 2016.

Traders said that investors are concerned Congress won’t be able to pass a spending bill by the end of Friday to avoid a government shutdown. The spending bill has stalled because of a disagreement between Republicans and Democrats on an immigration bill.