Guidance: US Dollar May Consolidate Through Year-End, Rally to Resume in 2012

By Ilya Spivak, Currency Strategist

Major Currencies vs. US Dollar

(week-to-date % change)

US_Dollar_May_Consolidate_Through_Year-End_Rally_to_Resume_in_2012_body_Picture_5.png, US Dollar May Consolidate Through Year-End, Rally to Resume in 2012

Tight correlations between most major currency pairs and the S&P 500 suggest broad-based market sentiment trends remain firmly in control of FX market price action, with the Eurozone debt crisis still the issue at the forefront. The week began with broad-based disappointment in the outcome of last week’s EU leaders’ summit, sending the safe-haven US Dollar racing higher against its top counterparts. Looking ahead however, momentum seems likely to slow.

While there has been no meaningful progress on resolving the Eurozone’sproblems or assuaging investors’ general unease with the increasingly dour outlook for economic growth in the year ahead, there hasn’t been significant deterioration either beyond what was already in place. This means that without new fuel to feed risk aversion, seasonal factors may force a period of consolidation.

Indeed, the markets find themselves just ten days removed from the Christmas holiday observed in most major financial centers and only two weeks away from the New Year break, with most major scheduled event risk already out of the way between now and 2012. This means traders are likely squaring their books and starting to pack up for vacations, preferring not to force any major moves or over-commit to their positions until January. On balance, this suggests that barring a major change in the overall landscape, sideways trade may persist from here over the near term.