Consolidation Is The Vogue Trade. By Gary Stride

Ask traders where the dollar is going next and most will say down, a very few may say up, but very few will say nowhere.

But nowhere, or rather consolidation around current levels, may be the in-trade for the next few days at least.

Few in the market would disagree that the dollar is oversold at its current levels against the majors, and that a period of corrective strength is overdue. However even fewer are prepared to back up such thoughts with lasting deeds, as seen last Friday.

A combination of negative closes in U.S. stocks Thursday and in Asia Friday, combined with gold and oil prices stalling, triggered a risk aversion move back into the dollar.

However that move lasted just for a few hours, or rather it lasted until European equities moved back into positive territory, which sent the new dollar longs scrambling to exit.

The result, a market that was too scared to hold dollar long positions but also too frightened to sell the dollar to fresh 2009 lows.

So what's the answer?

Well a period of consolidation will help unwind overbought signals evident in most dollar/currency pairings.

Barclays Capital says the euro/dollar is overbought on the daily and weekly charts with sentiment strongly euro bullish, and this makes the market potentially extremely unstable into next week.

However if the rate can stay above S1.4635 or $1.45 at worst, then $1.48 and $1.49 beckons.

Much the same view comes from RBC Capital Markets chief technical analyst George Davis who says euro/dollar support at $1.4525 will serve as a retracement target after valuations have reached overbought levels.

Davis adds that as at last Friday the dollar was oversold against sterling, yen, the Swiss franc, and the Aussie and New Zealand dollar.

By trading sideways for a while the underwater dollar bulls may have a chance to trim their losses, while the in-profit dollar bears will have a chance to pick up some cheap euros, yen, Swiss francs, and the list goes on.

So consolidation trades could well be the new in-vogue word and trade until at least Wednesday, when the data calendar picks up and the Federal Reserve delivers its latest interest rate decision and up-to-date views on its Mortgage Backed Securities purchase program.

Early Monday, the dollar is a little firmer from levels seen late Friday, with sterling remaining under pressure following Friday's disclosure that Lloyds Banking Group failed a Financial Services Authority stress test, while the yen is weaker after Japan's new finance minister, Hirohisa Fujii, also threw the nervous market a curve ball Friday.

Only last week the incoming minister told the markets that a strong yen had merits for the Japanese currency and that the new government was opposed to currency intervention.

However Fujii somewhat backtracked Friday, saying that he didn't want to be labeled as supporting a strong yen and that he shouldn't comment on currency rates.

The dollar/yen, which came within a whisker of the psychologically important Y90.00 level last Wednesday, currently trades at Y92.19 from Y91.30 in late U.S. trade Friday.

The pound is worth $1.6156, which is down from $1.6270, and the euro fetches $1.4650, down from $1.4707.