Speculators drove the Euro higher on surging oil prices and talk that the ECB may raise interest rates once again to curb inflation.
Just one day after the Dollar posted a strong gain against the Euro and looked as if it was ready to start a new leg up on this rally, traders sold in a big way forcing the Dollar to retrace 50% of its gains since April 22.
With crude oil ready to overtake $130 per barrel and a story circulating that the ECB would raise rates once the global financial crisis was abated, shorts that have been slowing building their positions over the past month were forced to lighten up because of this dramatic shift in sentiment.
The major concern in the Euro Zone is the high cost of energy leading to runaway inflation. It was reported on Tuesday that producer price inflation accelerated at the fastest pace in almost two years. This news prompted an advisor to the German government to warn of a rise in interest rates.
The EUR/USD broke through the 50% retracement price from the April 22 top. This price was 1.5651. The market has to hold above this price to attract more buyers for a drive to the next retracement price at 1.5738.
Look for additional support at 1.5463. The upside target of this rally is 1.5809.
USD/JPY Falls as Higher Oil Weakens the Stock Market
USD/JPY traders sold Dollars to buy Yen as the U.S. stock market fell sharply on higher crude prices. Traders sensing financial uncertainty desired the safety of the Yen over the potential return of the stock market.
In other minor news, the Bank of Japan decided to leave interest rates at 0.50%.
Technically, the pair is in a range with two key tops at 105.43 and 105.71 and 102.56 the main bottom. A break through this price will turn the main trend down with downside targets of 101.61 and 100.72. Look for resistance at 104.30.
USD/GBP Overcomes Resistance
The short-covering rally continued in the GBP/USD as the market broke through a key resistance area prompting recent sellers to pull in their positions.
Fundamentally, the Pound is finding strength on talk that high inflation may force the Bank of England to raise rates at its next meeting on June 5.
The Pound is currently in a range of 2.0027 to 1.9362 with a mid-point at 1.9695. This price controls the short-term direction of the market. Additional resistance is at 1.9781 and 1.9807.
With the trend down, the market may still experience some hard corrections in its effort to establish a secondary higher bottom. This area is 1.9562 and 1.9462.
Traders Seek the Safety of the Swiss Franc
Traders sold Dollars against the Swiss Franc on Tuesday, as the U.S. stock market broke hard on profit taking due to uncertainty over the economy because of the extremely bullish crude oil market.
The USD/CHF changed its trend to down on the break through 1.0389. The first downside target is 1.0256. With the trend down, look for resistance at 1.0401 and 1.0501.
Firm Crude Oil Keeps Pressure on USD/CAD
The USD/CAD remained weak as firm crude oil prices helped support the Canadian Dollar. Strength in wheat and gold could also attract new selling pressure to the greenback. The combination of higher commodity prices and an improving Canadian economy have proved bearish for the USD against the Canadian Dollar.
The momentum of the break seems to be abating as the pair has apparently reached an oversold level. In addition, there are some concerns that the U.S. economy may continue to weaken which may have a spillover effect on the Canadian Dollar.
There is a cluster of old bottoms at .9796, .9740 and .9709 providing support, which may scare out some of the weaker shorts. With the main trend down, look to sell a retracement to 1.0026.
AUD/USD Makes another New All-Time High
The AUD/USD rallied to another 24-year high. There is now talk that traders will try to drive this market to par with the Dollar.
The Reserve Bank of Australia also released the minutes from its last meeting. These minutes showed that policymakers were considering an interest rate hike.
Look for support at the old main swing tops at .9510 and .9544.
Commodity exports account for a large percentage of the Australian economy so the higher the crude moves, the more likely the uptrend in the Aussie is going to continue. Higher gold prices have also been supportive.
The next Reserve Bank of Australia meeting is on June 3. Traders should carefully watch the chatter before this meeting to get a sense of what the RBA is considering.
Short Covering Helps Support NZD/USD Market
The NZD/USD recovered from the selloff on 5/20 to post a gain on Tuesday. This is still a short covering rally as the main trend is still down.
Currently, the market is reaching an important resistance zone at .7737 to .7784. There may be some selling on the first test of this level. Overcoming this price zone indicates the buying is strong with the possibility of a rally back to .7827.
With the main trend still down, look for .7696 to hold on a break. This action would be important, as the market needs to make a secondary higher bottom to attract new buyers.
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