The EUR/USD fell on Monday mostly due to portfolio adjusting and position evening as the second quarter ended. This short term down move in the Euro is likely to be short-lived, however, as an ECB meeting and the U.S. non-farm payroll report later this week are expected to provide a boost.
The early part of this week is expected to be relatively quiet as traders await the ECB meeting and the U.S. employment news on July 3. Traders expect the ECB to raise rates to 4.25%, and the U.S. non-farm payroll report is forecasted to show that the U.S. lost about 60,000 jobs, the sixth month in a row with losses.
The rate increase by the ECB was solidified on Monday as an inflation report from the Euro Zone showed that consumer prices jumped to a record 4.0%. This figure was more than double the 2.0% target. Talk is circulating that ECB President Trichet's hawkish comments have split the ECB. Some members of the ECB feel that the rate hike is too aggressive and may hurt future Euro Zone economic growth. In addition to discussing the short-term hike, the ECB will also release some information as to further interest rate hikes beyond July. This is the part of the report which may send the EUR/USD to a new all time high.
On the other side of the Dollar equation is the Fed. Since last week's FOMC meeting, the Dollar has fallen tremendously because the FOMC was unclear about the future of U.S. interest rate hikes. Financial traders in Chicago are speaking, however, by decreasing the possibility of a rate hike on August 5 from 40 percent last week to 25 percent this week. The situation is getting so bleak for the Dollar that comments from Treasury Secretary Paulson stating that a strong Dollar is in the nation’s interest could not move the market like it did a few weeks ago.
The USD/JPY rose on profit taking following last week's sell-off. Monday’s rally showed how sensitive the Yen is to the movement in the U.S. stock market. As the stock market fell last week, money poured out of equities and into the safety of the Japanese Yen. The lack of clarity and conviction by the Fed in the latest FOMC announcement has spread over to the U.S. equity markets. Equity traders have lost confidence because of the Fed's ability to fight inflation, slow growth, and a financial crisis at the same time. All of this adds up to a bearish situation. With the stock market near an oversold level, however, traders should wait for a one to two day rally before initiating new shorts.
The GBP/USD rose early in the day on Monday before settling lower for the day. Fundamentally, the weak and unclear statement by the FOMC regarding future interest rate hikes combined with the Bank of England's Governor Mervyn King's comment, stating although inflation is rising now, we will ensure that it falls back to the 2 percent target, helped launch this latest up move. Traders are interpreting this statement as an indication that the BOE would raise rates in the near future if necessary. With the Fed sitting on its hands, the Pound is the more attractive currency at this time. The charts indicate the next upside target is 2.0013 to 2.0027. Key support at 1.9888 has to hold or the market could fall back to 1.9684.
The USD/CHF closed higher after coming close to a major retracement price at 1.0130. The initial down move in the pair started on speculation that central banks would begin accumulating Swiss Francs to add to their reserves. Another factor supporting the Swiss Franc was talk of an interest rate hike by the Swiss Central bank to combat accelerating inflation. Finally, rumors that Russia will be a big buyer over the near term also provided early session pressure. After the break, technical traders took over and bought at 1.0135 in front of a 50% level at 1.0130. Additional support for the USD/CHF came from position evening by short traders as the U.S. stock markets posted a small gain. If the upside momentum continues, then look for a selling opportunity at 1.0301.
The USD/CAD rallied as Canadian traders are expressing concerns over the high price of oil stifling the Canadian economy. Traders are beginning to feel that the Canadian economy may slow down as consumers cut spending due to rising gasoline prices. In addition, the weak U.S. economy and a risky financial sector are making traders think twice about getting overly bullish in the Canadian Dollar since each economy is so closely related. Look for choppy two-sided trading.
The AUD/USD posted a new 25-year high then backed off into the close. Strong commodity exports, especially in coal and iron ore, are the driving forces at this time. The weak close indicates some light profit-taking. The charts indicate a break back to .9493 may occur over the short run. A trade back to this price is likely to be bought. Longer-term traders are citing the weakening U.S. economy and the inability of the FOMC to take a stand on future interest rate hikes as the main reason to be long the Aussie for a move to 1.00 before the end of the year.
Despite a contracting economy, traders are still supporting the NZD/USD. Many Kiwi traders feel that the FOMC's statement was not aggressive enough and are taking longer-term positions against it. The higher yielding New Zealand Dollar is making it an attractive bet. Technically, the trade through .7647 turned the main trend to up for the first time since late April. The charts indicate the rally may find resistance at .7684 to .7740. Overcoming this area sets up an acceleration to .7770.
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