Thursday's break in the Euro seems to be more technically driven than fundamentally driven. The media seems to think that the break may have been caused by a report showing an increase in consumer spending. This probably created confusion because a report on Wednesday showed consumer confidence at a multi-year low of 64.5. Based on the light trading action, it appears that the longs just decided to lighten up until fresh fundamentals can set the tone.
Some technical firms that study percentage movement in the market issued sell signals as their programs indicated that the rally of the past two days was too much too soon. This makes sense since markets do become overbought and run out of buyers.
All this being said, the driving force behind the strength in the Euro versus the Dollar remains the interest rate differential. As long as this spread is favorable to the Euro side, it is going to move higher. The ECB can handle a trending market. A volatile market would be a cause of concern.
Since the Euro did not post a new all-time high yesterday, one has to say it is range bound, albeit a very wide range. This means that the market will be subject to retracements inside of the range until it breaks either side. If you look at the EURUSD's percentage gains versus the other USD pairs, something looks out of place.
While it may be too early to call a bottom in the Dollar, something does not feel the same about this last leg. The EURUSD challenged the all-time high while the USDCHF, USDJPY, and the GBPUSD barely made it to their Fib retracement prices. Additionally, the U.S. equity markets may have stopped going up on the recent Euro bottom, but it did not crumble when the Euro neared new highs. Finally, the commodities markets, which had been bought for long positions against the short Dollar, have not really regained their powerful upside momentum.
Although a top signal has not yet been given, something seems to be going on which is indicative of a developing divergence between the Dollar, U.S. Equities, and commodities. For weeks, traders have been calling for a coordinated intervention between the G-7, the Bank of Japan and the European Central Bank. Maybe something is going on behind the scenes to cause this divergence.
Fundamentally, the U.S. reports Personal Income, Personal Spending, and the important Core PCE Inflation on Friday at 8:30 A.M. EDT. These reports are followed by Michigan Sentiment at 10:00 A.M. EDT.
Technically, the EURUSD failed in its attempt to make a new all-time high. Traders cite overbought conditions. If this is the case, then look for a retracement back to at least 1.56. It is going to take a complete weekly reversal down to signal a major top. This move seems very unlikely. Look for range bound trading to continue.
GBPUSD lost ground as profit-takers came in close to a resistance price at 2.019. Look for a pull back to 1.996. The trend remains down, as this move appears to be a retracement of a previous break. Traders are concerned about UK banks and uncertain about the direction the BoE is going to take on interest rates at its next meeting. Negative comments this week from the BoE stating that it expects the Pound to decline as economic growth slows continue to weigh on the pair.
The decline in the U.S. equity markets surprisingly had very little effect on the USDJPY. Traders have been buying Yen on down stock market days; Thursday was an exception to this. This action may be part of the action going on behind the scenes. The BoJ has been quiet for a while. On the technical side, the break came close to a 50% retracement of the recent break. If the market holds this price at 98.08, then look for a test of the last main top at 101.03. A breakout through this price turns the main trend to up.
USDCHF firmed up late in the session despite weakness in all three major stock indices. Technically, this pair found support inside of a key retracement zone at .9948 to .9877. Light buying did surface. If it can hold in this zone, there may be a retrace to 1.006. Breaking this support level indicates a potential test of the all-time low at .9647. The main trend is down and will turn up on a trade through 1.025.
News that the BoC is expected to cut rates by 50 bp at its next meeting is helping the Dollar against the CAD. Signs that the U.S. economic slump is worsening is causing traders to think that it will drag down the Canadian economy. Small business confidence is also down. The Canadian economy is commodity driven. Strong rallies in wheat, gold and crude may provide short-term support; otherwise continue to look for downside pressure. Technically, the new main top is 1.03 followed by 1.038. On the downside, support has been established at 1.000 and .9987.
The AUDUSD failed to take out the resistance zone at .9211 - .9272. The market will have to overtake this resistance to drive higher to challenge the all-time high. Seller emerged at this level triggering a potential break to .9102.
Fundamentally, if the U.S. cuts rates, then the rate differential will widen between the Dollar and the Aussie. Traders are currently betting heavily that this will occur by the end of April. Overall, the strong Australian economy is supportive to this current rally. Look for buyers at .9102.
Traders seeking a higher yield make the NZD attractive. The interest rate differential between the U.S. and New Zealand is about 6 percent. Technically, the market halted at the resistance at .8081. Look for a possible pullback to .7983 before new buyers return. Regaining .8081 and establishing support at this level is likely to help this market make another run at new all time highs.
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