The ECB is expected to announce an interest rate hike of a quarter point to 4.25% on Thursday. With upside momentum already building, look for the EUR/USD to challenge the all-time high at 1.6019 after the hike. Based on the recent comments from ECB President Trichet, who stated that there's a risk of inflation exploding, some traders are anticipating this to be the start of a series of interest rate hikes rather than a one time event. Talk is circulating that rates may rise into December.
Wednesday's ADP report showed that U.S. companies cut more jobs than economists had forecast. This weaker than expected report kept the Dollar on the defensive all day and caused financial traders in Chicago to reduce bets that the Fed would cut rates at their next meeting in August.
Over the past three weeks as the German interest rate market became more confident that rates would rise, the spread differential between two-year German Bunds and two-year Treasury Notes widened. This spread differential is making the Euro a more attractive currency than the Dollar.
There has been no real reaction from the Fed or the Treasury on this recent rally in the Euro. The Fed spoke the loudest most recently through its FOMC declaration when it failed to clarify its position on the future of interest rate hikes in the face of weakening U.S. economic data.
The Fed seems to be at a disadvantage at this time in relation to the ECB. The ECB is mandated to control inflation at a set rate of 2.0%. The Fed, on the other hand, has to battle inflation while trying to stimulate growth. At this time, the Fed's hands are tied, not only because of inflation and slow economic growth, but also because of the looming crisis in the financial sector. Although the Fed was able to facilitate the dissolution of Bear Stearns back in March, it has already warned banks and other financial institutions to raise their own funds. Although the Fed was unclear of its position on the future of interest rate hikes the rest of the year, it is very clear that it is not capable of enacting any decision until inflation subsides; the economy bottoms and the financial markets stabilize. Until all of these factors can be brought under control, look for a strong Euro.
Technically, the EUR/USD regained a key uptrend line at 1.5862 today. As long as this pair can hold above this price, look for a rally to challenge the all-time high at 1.6019.
The USD/JPY closed lower on Wednesday following a sharp late session sell off. Risk adverse traders quickly bought back short Yen positions placed yesterday during the reversal up. This action demonstrates how frightened traders are to be long U.S. equities. Continue to look at the stock market for direction.
Technically, the early session rally stopped near a 50% retracement level at 106.70 before selling off. The weak close has this pair in a position to test minor support at 105.48 to 105.58. Once this area is penetrated, look for a retest of the week’s low at 104.97. This market gets extremely weak under 104.86.
The GBP/USD fell sharply as housing problems were the center of attention as the U.K's largest homebuilder’s shares broke after failing to attract new investors. Another bearish factor was a report showing the U.K. construction industry had contracted in June at its fastest pace since 1997.
Mervyn King's comment, stating, Although inflation is rising now, we will ensure that it falls back to the 2 percent target supported the market for the past week, but the news about the floundering housing market should be enough to temper any talk of a Bank of England rate hike over the near term.
Although the U.S. ADP data did help support the market early in the New York session, the housing market problems carry more weight in the U.K. economy, hence the possibility of a continuation of the break tomorrow. With the housing industry's problems expected to linger, the only supportive factor for the Pound will be a weaker than expected U.S. unemployment report.
Technically, the GBP/USD has major resistance at 1.9998 to 2.0027. A breakout over this level could launch a strong rally. On the downside, a continuation of the break is likely to attract strong buying at 1.9708 to 1.9688.
The USD/CHF once again held the bottom at the major retracement price at 1.0130. The lack of follow through to the upside following Monday's reversal bottom was caused by the weaker stock market. New lows in the stock market are likely to trigger a break of 1.0130. This would set the stage for a break all the way back to 1.0025. On the upside, the strongest resistance is 1.0261, followed by 1.0335. Watch the stock market for direction today.
The USD/CAD fell sharply on the strength of the crude oil market and gains in wheat and gold. As long as these key Canadian exports continue to post gains, look for the Dollar to weaken. Traders are beginning to believe the Canadian economy is stronger than the U.S. economy after having doubts earlier in the week. The short-term range is .9818 to 1.0321. This makes 1.0070 to 1.0010 an important support area.
The news has been mixed over the past few days for the AUD/USD. Earlier in the week after posting a new 25-year high, the Aussie broke on a report that the growth rate Australia is currently experiencing could not be sustained over the long run. One day later, a report showing that retail sales climbed at the fastest pace in six months brought aggressive buyers back into the market.
Technically, the strong close has the market in a position to test the 25-year high at .9668. Regaining .9681 would be extremely bullish. This market has to hold support at .9626 or new selling pressure could force a break down.
The NZD/USD sat in a tight range in a losing effort on Wednesday as Bank of New Zealand Governor Alan Bollard implied that the economy was slowing. This really came as no surprise to the market as it is already known that the New Zealand economy is in a contraction phase. Traders seeking a higher yield are supporting this market despite the bearish fundamentals.
The charts indicate a trade through .7664 is needed to confirm an uptrend. Pressure through .7531 would be a bearish signal.
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