The Euro rallied against the Dollar on Wednesday as ECB members tried to explain the anticipated interest rate hike in July. Early in the session, one member of the ECB explained that his belief was that the rate hike would be a single event and not a series of hikes. The Euro reached its lowest point of the day on this comment.

Later in the session, another member of the ECB stated that it was his belief that there was the possibility of a series of cuts. The Forex traders seemed to put more weight in his rational for a series of hikes and rallied the Euro into the close.

These two comments support what I have been saying for two months: until either the Fed or the ECB actually raises rates, the Euro is likely to trade inside of the 1.60 to 1.52 range.

The ECB seems to have more flexibility in this matter as the Euro Zone has not gone through the same economic weakness as the rest of the world. The Fed and the Bank of England, for example, are still waging a delicate battle between fighting inflation and choking of an economic recovery that may just be starting.

Financial traders who bet on the direction of interest rates by committing to spread positions are already factoring in the possibility of a rate hike on August 5. The sentiment rose in one day from 31% to 52%. Traders have also increased their bets that the Fed will raise rates in December from 67% to 96%.

With nothing expected to happen to interest rates for either the ECB or the Fed until July, continue to look for buying to stabilize the Euro near 1.52 and selling to stabilize the Euro near 1.60. The market may just settle into news driven range with trading on both sides of 1.56.

The Possibility of Higher Rates in the U.S. is driving the USD/JPY

The USD/JPY is expected to continue to rise as the interest rate spread between the U.S. and Japan is widening. Traders are selling the Yen and buying the Dollar to capture the higher yield in the U.S.

Japanese Yen put activity is up, indicating that traders are betting on a steep decline in the currency. Look to buy breaks especially after two day breaks.

Bank of England Faces the Challenge – To Raise or Not to Raise

Inflation is being reported everywhere, which is the main reason the Bank of England refused to lower rates earlier this month. Since the U.S. is also expected to raise rates later in the year, the U.S. Dollar has become more attractive relative to the Pound.

With consumer confidence down along with the housing market, but food and energy prices surging, the Bank of England is stuck in a tough position. Should they raise rates to fight inflation, or should they leave rates unchanged to allow some of the earlier cuts to take hold and support the economy.

This market is trading sideways to lower as traders are defending a series of bottoms at 1.9362 and 1.9336. If these bottoms fail to hold, then the market could drop sharply lower to 1.9181, the March 5, 2007 bottom.

Swiss Franc Gains as U.S. Stock Market Drops Sharply

On Wednesday, Forex traders resumed the long downtrend that has come to a quick halt following the sharp two-day counter-trend rally.

Traders lost their appetites for risk because of the uncertainty in the banking sector, higher inflation and the almost constant rhetoric about inflation. This caused USD/CHF traders to sell Dollars to pay back borrowed money in Swiss banks. Look for this carry trade liquidation to continue as long as economic uncertainty dominates the market.

With the U.S. now expected to raise rates as early as August instead of December, Swiss traders have been adjusting their positions to accommodate this change. Swiss financial market traders had been trading for a hike in Switzerland in December.

Look for the USD/CHF to firm against the Dollar over the short-run, but do not expect the trend to change to up on this move. The market looks as if it needs to have one more test of the recent lows to attract buying interest. Stand aside until a trend develops or be prepared to trade both sides of the market.

Bank of Canada Does an About Face; Shifts its Focus on Inflation

One day after the Bank of Canada surprised everyone by leaving rates unchanged, the financial markets began to price in a potential interest rate hike for later in the year. Economists who advise the Bank of Canada must be seeing something that is not obvious to the small trader.

Just a few weeks ago, a report showing that the economy had shrunk in the fourth quarter sent a clear signal to USD/CAD traders that a 25 to 50 point basis point cut was needed to stimulate the Canadian Dollar. Over the same period, both the Fed and the ECB warned of higher interest rates. Rather than try to support the economy and go against the developing global trend of higher interest rates, the Bank of Canada decided to keep rates the same.

Look for the USD/CAD to give back close to half of its gain over the past two weeks and settle into a range near par.

Australian Dollar Gets Weak as Technical Support Points are Violated

Bearish fundamentals were the first indicator to point toward a lower Australian Dollar. The first sign of weakness was the financial markets' signaling that interest rates were going to remain unchanged. The second signal was the implication that demand was down so the need to raise rates had dissipated.

Earlier in the week, Treasury Secretary Paulson delivered a blow to the Aussie by suggesting that intervention is an option to help the Dollar.

These three fundamentals set the tone for lower prices, but they were confirmed by the change in trend to the downside when the Aussie broke through a previously well established up trend line at .9485.

With both the fundamentals and the technicals in agreement, look to sell rallies in anticipation of a further decline.

Higher Global Rates and a Possible Intervention Pressure NZD/USD

The threat of higher global interest rates coupled with the possibility of a U.S. Treasury intervention should continue to push the NZD/USD lower. Bad unemployment numbers and a weak housing market in New Zealand are also bearish factors.

Look to sell rallies following the next short-covering rally for the start of a long-term break. The charts indicate a move to .7427 to .7200 is possible. Look for the short covering to start in this area.

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