The Dollar Rallies on Chinese Central Bank Rate Hike

ForexNewsNow | Published on October 19, 2010 at 2:05 pm

US dollar indexNEW YORK (Forex News Now) – During the past 2 weeks of trading, the GBP/USD attempted to break through the 1.60 area and follow other European currencies to higher levels against the dollar.

A combination of fundamental factors created the impetus for today’s dollar rally, and the Pound certainly fell victim to a consolidation that allowed bears to gang up and push the currency pair lower.

The timing of the Bank of China’s rate hike is prior to a large amount of data, which is scheduled to come out this week. The combination of a strong CPI and liquidity in bank lending created the spark, which lead the PBOC to pull the trigger on rates.

Property prices rose 9.1% year over year, down from 9.3% year over year in August, which is slowest since December ’09.  The CPI is expected to rise 3.6% year over year, which reflects stubbornly high inflation.   August PPI is expected to rise 4.1% year over year.  Retail sales are expected to grow 18.5% year over year, which is still a very robust number.   Overall, the numbers point to an economy that is beginning to slow down, but the Chinese are not satisfied with their soft landing trajectory, and must have believe that a hike was important.

The “question of the day” is whether the rally in the dollar will continue, or will the fundamentals prove to be strong.

Technical Picture

The GBP/USD analysis shows the currency pair is coming of a divergent RSI signal were the recent highs in the GBP/USD were not confirmed by a new high in the RSI.  The Bollinger bands turned in creating a consolidation pattern, which could continue in the 1.57-1.55 range.  A close below 1.55 should lead to a move to the recent lows near 1.53.  The RSI has horizontal support levels near 40, which will likely coincide with the daily close trend line near 1.55.

Risks

The Chinese data could likely come in higher than analyst expected, which would probably create further selling since the market, would believe that the PBOC is behind the curve and further rate hikes might be coming down the pike.  GDP data during the last tightening cycle was close to the 13% range, which is a good deal higher than this week’s expected 9.5%.  These conflicting signals will keep the markets active.

The GBP/USD analysis as it related to the UK economic data has recently been mixed.  A spark came from the Housing Data released early in the week.  The BOE is struggling internally to determine the path of a second round of bond buying.  A positive outcome might be the catalyst for another leg down.

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