The EUR/USD fell on Monday as German business confidence fell in June to the lowest levels since 2005. Because of this report, traders reduced bets that the European Central Bank will aggressively hike rates this year. Following the release of this report, the interest rate differential between the Bund and the Bond tightened as financial traders adjusted positions to reflect the latest news.
Another key report showed that Europe's manufacturing and service industries unexpectedly contracted this month. This was another blow to those traders who believed a rate hike out of the ECB was a certainty.
Trader’s now have to believe that the ECB has to reevaluate its call for a rate hike in July.
Technically, the EUR/USD is in a range from 1.6019 to 1.5282 with a mid-point of 1.5651. The rally failed at 1.5651 on 6/20. The latest news has traders thinking that selling pressure will eventually erode the support at 1.5282.
Oversold Condition Helps USD/JPY Firm after Five Day Sell-Off
The USD/JPY rallied on Monday as traders sensed an oversold condition was developing and took profits after a five-day break. Since 6/16, the Dollar has been under pressure against the Yen as lingering news about the weakening U.S. credit markets caused traders to rethink their commitments to the U.S. Dollar. During periods of uncertainty, traders often seek the safety of the Yen.
During the trading day, a report was circulating that Japanese Business Confidence was expected to drop to its lowest level in five years. Traders were blaming higher energy and commodity costs for squeezing the profits out of corporations amid a global economic slowdown.
Talk is going around that the Bank of Japan wants to increase rates because of inflation, but fears triggering a recession.
Finally, over the weekend the Japanese government announced that it is exploring the possibility of tax incentives to entice investment in Japan. Although on paper a bullish proposition, traders largely ignored this news.
If this rally fails near 108.00, chart watchers are looking for the correction to resume with a break to at least 106.49 likely.
British Pound Dives on Bad Housing Number
The GBP/USD could not continue the upside momentum generated by last week's better than expected Retail Sales Report. A bad housing number caused traders to rethink whether the economy was turning around. Because of this news, financial traders are signaling that the Bank of England may not be in a position to hike rates in the near future.
The interest rate differential, which had widened last week on hopes the Bank of England would consider a rate hike, narrowed, thereby making the U.S. Dollar a more attractive investment.
USD/CHF Rallies as Swiss Government Scales Back Economic Forecast
Following the weak trade last week, the USD/CHF rebounded on Monday with a strong rally. A report stating that the Swiss Government had scaled back its economic forecast for 2009 caused traders to aggressively cut back on short positions initiated last week. The government cited the slowing global economy and high inflation as the reasons behind its decisions.
The key to maintaining this uptrend is to hold breaks back to 1.0348 - 1.0345. This is a support cluster consisting of an up-trending Gann angle and a 50% price. Although the next resistance level is 1.0481, strong momentum could take this price out and accelerate a trade up to the last main top at 1.0541. If upside momentum remains strong all week, then look for a further rally to 1.0630.
USD/CAD Traders Say Commodity Prices Will Dictate Short-Term Direction
USD/CAD traders are closely monitoring the commodity markets this week, as they are likely to dictate the short-term direction of this pair. Surging crude oil and grain prices, which account for a large portion of the Canadian economy, are expected to keep the USD/CAD under pressure until they start to weaken.
The charts indicate that the market may have put in a major top at 1.0323. Traders also feel the inability of the USD/CAD to penetrate 1.0350 on the last rally is sign that the market has run out of buyers.
Based on the last rally, the market is expected to correct back to 1.0071 – 1.0011 before new buyers step in. Look to sell rallies with exits above 1.0323.
Australian Set-Up for Technical Retracement
The AUD/USD fell on Monday as traders took profits following a week-long rally. Technical traders are looking for a 50% retracement of the last rally before new buyers step in.
The interest rate differential is still favoring the long side of the Aussie versus the Dollar. With U.S. rates dropping, traders trying to squeeze out a little more yield had been selling Dollars to buy the AUD/USD. This trend is likely to pick-up again after the FOMC meeting on the 25th.
The AUD/USD is still in a downtrend based on the double-top formation at .9655 (05-21-08) and .9648 (06-09-08). The current short-covering rally taking place makes a range of .9648 to .9326 with a retracement zone at .9487 to .9525.
Although the last week's high at .9566 exceeded this retracement zone, it could not penetrate a down trending Gann angle at .9548 today. Based on the current set-up, the market is poised to retrace at least 50% of the current short-covering rally. Look for a break back to .9446 - .9418.
Profit-Taking Could Break NZD/USD 50% of the Last Rally
The NZD/USD main trend is down. The main range is .7922 to .7445 with a retracement zone at .7684 to .7740. The current rally from the .7445 (06-13-08) main bottom stopped short of a 50% retracement to .7684 before breaking.
The series of lower tops and lower bottoms since the all-time high at .8215 (02-27-08) is likely to continue so expectations are for this next break to continue down through .7445. Counter-trend traders may want to look for support at .7546 to .7522 for a buy. If this area holds, there is a slight chance that the market will attempt another rally.
Fundamentally, the weak New Zealand economy is likely to lead to a rate reduction by the Reserve Bank of New Zealand later in the year.
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