On Thursday the European Central Bank decided to leave interest rates unchanged without offering any direction as to if or when a reduction would take place. Traders, however, were dealt a surprise when ECB President Bank President Trichet issued a somewhat dovish comment stating the Euro Zone countries were in an "episode of weak activity." Trichet's statement ignited some selling pressure which was fueled further when Luxembourg Finance Minister Jean-Claude Juncker added that the currency was "overvalued."

Trichet's comments should be interpreted as somewhat dovish because they did not include any comments about future interest rate reductions. Reading further into his comments, one can conclude that he is still concerned about inflation when he stated "upside risks to price stabilityprevail." His more dovish comment mentioned the downside risk to "growth."

Technically, this pair is nearing oversold levels, but the ECB decision and the subsequent comments are providing a very constructive picture to the long-term direction of the U.S. Dollar. Continue to look for confirmation of the slowing Euro Zone economy while paying close attention as to whether inflation is declining. Traders want to see a down tick in inflation to gain confidence that the ECB will lower rates at its next meeting.

The USD JPY sold off sharply as traders are once again beginning to lose confidence in the growth of the U.S. economy and the stability of the U.S. credit markets. Speculation that the global economic slowdown will trigger a weaker U.S. economy is leading investors to reduce holdings of higher-yielding U.S. assets to pay back loans initiated in Yen. Investors also seem to be trading out of fear that the downturn in the U.S. stock market will fuel a resurgence of the credit market issues which have plagued the U.S. economy for over a year. Technically, this pair has reached the retracement zone of the 103.76 to 110.65 range at 107.21 to 106.39. Watch for a technical bounce to the upside in this area as Thursdays break may have been too much too soon.

The GBP USD remained under selling pressure as the Bank of England resisted calls to lower rates and instead left interest rates unchanged at 5%. In leaving interest rates unchanged, the BoE policy makers are implying that they fear inflation more than they fear a recession. Recent reports indicate high inflation in the U.K. is hurting the economy. Those who cite the need for an interest rate reduction are pointing toward rising unemployment and a rapidly deteriorating housing industry as the main reason to stimulate the economy now. Traders want the BoE to see the urgency in the situation to prevent the U.K. economy from falling into a deep recession. The BoE seems to be on a path which will allow the economic slowdown to gradually pull down inflation, thereby reducing the need for aggressive interest rate reductions. Until an inflation report shows that this theory is working, look for more selling pressure to continue to erode the long term support.

The USD CHF felt selling pressure on Thursday as traders are beginning to fear more economic weakness in the U.S. economy and a possible rekindling of the U.S. credit crisis. Traders seem to be afraid to hold on to higher yielding U.S. assets without strong confirmation that the economy is sound and that the credit markets are stable. Although there is no clear reason to support the aggressive selling, investors have learned from past mistakes and are choosing at this time to be more conservative. Until these psychological factors change, continue to look for more selling pressure as the demand for safe haven investments is increasing.

The USD CAD continued its yo-yo trading on Thursday as the market rallied following a sharp sell-off on Wednesday. Traders seem to be looking at Wednesday's decision to leave interest rates unchanged as a past event and are now looking forward to new economic news. On Friday, traders will be watching both the Canadian Unemployment Report and the U.S. Non-Farm Payroll number for clues as to the strength of either economy. The Bank of Canada, in leaving interest rates unchanged at 3%, could be saying that inflationary activity remains at a level that cannot justify a rate cut to stimulate the economy. Another interpretation is that the economy is not declining fast enough or at a level that would need a rate reduction for stimulation. The up and down trading these past two days is indicative of the indecisiveness of investors. One way to settle the differences in opinion is to focus on the commodity markets. Lower crude and gold should continue to provide support for a stronger Dollar versus the Canadian Dollar.

AUD USD remained under pressure following the Reserve Bank of Australia's rate cut on September 2, but traders are beginning to think a further decline in U.S. interest rates may encourage investors to once again seek higher-yielding assets in Australia. This news may be the only positive development affecting this pair. Lower commodity prices and the fear that the global economic slowdown will continue to pressure the Australian economy is still encouraging liquidation of this pair. Other surprise bearish news was the negative trade balance caused by a spike in crude oil imports and a decline in exports. Lower commodity prices should continue to attract selling pressure, but another steep decline in U.S. stock markets could bring buyers back to Australia.

The NZD USD is still in a down trend and feeling pressure from the recent collapse in commodity prices. Investors, however, are eyeing the widening interest rate differential between U.S. Bonds and New Zealand bonds as a possible reason for U.S. traders to park funds in higher yielding New Zealand assets. Traders may be waiting for the NZD USD to test the August 2007 bottom before attempting to capture the higher yield which is being offered.