The Euro was slammed by news that U.S. productivity increased while Euro Zone economic activity slowed. This double-whammy of economic news now has traders thinking the ECB will adopt a less hawkish tone in its next statement on May 8.
The spread differential between German Bunds and U.S. Bonds tightened as traders placed bets that the German economy will continue to weaken while the U.S. economy starts to recover.
For the first time in three days, Dollar traders once again focused on the possibility that the Fed was ending its cycle of interest rate easing.
Because of the weaker than expected news out of the Euro Zone, traders will be looking to see if the ECB policy statement on May 8 reflects a less hawkish tone about the future of interest rates.
Another factor supporting the Dollar was the statement from Federal Reserve Bank of Kansas City President Thomas Hoenig that serious U.S. inflation pressure might force the Fed to begin raising interest rates.
The fear circulating in the financial markets is that higher energy and food prices have embedded themselves in the U.S. economy, which will compel the Fed to adopt a tightening monetary policy. This news is supportive to a firm Dollar.
On the charts, the EURUSD stopped short of taking out last week's low at 1.536, but the weak close puts it in a position to drive the market down further to 1.523.
Bank of England May Lower Rates
The GBPUSD fell as U.K. consumer confidence declined last month to its weakest level in four years. Based on this negative news, the U.K. financial markets are indicating that another rate cut by the Bank of England on May 8 may be necessary to stimulate the economy. If there is no rate cut, then traders expect the BoE to issue less hawkish comments about the economy over the short run.
The downtrend continued in the GBPUSD as the recent bottom at 1.9599 was soundly broken by heavy selling pressure. The weak close indicates more selling pressure is likely with a downside target of 1.9361 a possibility.
USDJPY and USDCHF May Be Signaling a Decoupling from the Stock Market
The hard sell-off in the U.S. stock market did not attract heavy selling in the USDJPY or USDCHF. This may be the first sign that the Dollar is decoupling from the Yen and Swiss. For months, the Dollar would rally while the stock market rose and fell on weak stock market days.
Wednesday's trade indicates that the possibility of an economic recovery in the U.S. rather than the carry trade may be the new driving force behind a rally in the USDJPY and USDCHF.
Watch the action in these markets over the next few days to see if the Dollar gets stronger while the stock market weakens.
USDCAD is Comfortable at Par.
Despite the developing strength in the U.S. economy, there was very little buying in the USDCAD as traders instead decided to focus on the strong crude oil's influence on the Canadian Dollar.
At this time, traders feel that the runaway rally in the crude oil will have a more positive effect on the value of the Canadian Dollar as the Canadian economy relies so much on commodity exports. As long as crude continues to rally, look for the USDCAD to hover around the1.00 area.
The longer-term fundamentals support a stronger USD so any weakness in the energy complex is likely to send the U.S. Dollar soaring. Until this happens, stand aside or be willing to trade both sides of the market.
Lower Commodity Prices Hurt AUDUSD and NZDUSD
The AUDUSD and NZDUSD fell on Wednesday as lower commodity prices, especially in Gold, and the prospects of firmer U.S. interest rates caused longs to lighten up their positions.
The Australian Dollar has resistance at its all-time high at .9541. With the trend up, look for new buyers to come in at .9390. If this area fails, then indications will be that the bias may be shifting to the short side.
The main trend is still down in the New Zealand Dollar. Resistance is at .7935. Look for a break back to .7830. If this area fails, then a new low top will be formed with more weakness likely.
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