Great start to the year for dollar

The US dollar starts 2015 on a positive note as it gains ground versus the euro and pound.

Dollar and euro notes
Source: Bloomberg

Draghi hints at QE

The European Central Bank chief has suggested that government bonds could be added to the purchasing list early in the year if inflation begins to slip. As I previously stated, January is going to be difficult month for the single currency as talk of quantitative easing and the political upheaval in Greece will erode the value of the euro. Mario Draghi has a track record of talking the euro lower as a weak currency benefits his policy, and I suspect he will continue to do.

German policy makers are opposed to purchasing government bonds but the largest economy in the eurozone may change its mind if its own strength begins to subside. On Monday 5 January, Germany will release its inflation figures and traders are expecting a drop from 0.6% in November to 0.4% in December. I get the impression Germany may become less vocal in its opposition to QE if deflation fears creep into its own nation.

On an hourly chart the euro is oversold so a pullback to $1.21 is possible in the short-term, but $1.20 is the target looking towards the end of the month.

Sterling slips overnight

The pound has started the New Year off on a negative note as a bullish move by the dollar drags sterling lower. Most traders are still in holiday mode and I foresee thin trading volumes and low market volatility in today’s session. Next week, the Bank of England will make its interest rate decision and no change to policy is expected.

Traders are not anticipating an interest rate rise from the BoE until the back end of the year, and some dealers are even penciling in 2016 for the first rate rise.

As I recently stated, the US is more likely to increase interest rates than the UK this year, but the Federal Reserve is concerned about the global economy. The slump in the price of oil, and lower growth in emerging markets could lead to the US central bank sitting on its hands in the medium-term.

December’s low of $1.5487 is the target and a move higher is likely to encounter resistance at the 200-hour moving average of $1.5569.

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