In a technically dominated trade, the EUR/USD fell as falling crude oil and a surging British Pound helped rally the U.S. Dollar. For the first time in four trading sessions, traders ignored news of an economic slowdown in the U.S. and instead allowed outside markets to dictate the short-term direction. The strong British Pound versus the Euro helped fuel the Dollar rally.
The financial markets in Chicago are indicating that the Fed is less likely to cut rates over the near term and that the ECB expected to raise rates in July. This anticipated action has widened the interest rate spread, making the Euro more attractive.
The key to higher markets, however, will be how the market reacts to a trade back into a retracement zone at 1.5573 to 1.5637. On Thursday, the Euro traded to 1.5586 before meeting sellers. This area is a battleground and controls the short-term direction of the market.
In order to create a bullish scenario, strong buying has to come in to thrust this market through the upper end of the retracement zone at 1.5637. If heavy selling surfaces, then look for another down leg to begin with momentum likely to push through 1.5282 this time.
Rally in Stock Market Helps Keep USD/JPY Steady to Better
In light trading activity, the USD/JPY worked inside of a narrow range on Thursday. This market is still having trouble breaking the week's high at 108.58 and a February top at 108.61. Chart watchers are looking for this correction to finish at 106.49 to 105.99. A correction into this area is likely to attract buyers.
Longer-term, the charts indicate a move to at least 109.94. The recent uncertainty in the stock market and the U.S. economy has temporarily slowed down the upside momentum. Traders have been seeking the safety of the Yen during times of economic turmoil. Look for the uptrend to continue once the stock market stabilizes.
Strong than Expected Retails Sales Drive British Pound Higher
The GBP/USD is in a downtrend, but showing signs of strength due to a better than expected U.K. Retail Sales number. This increase in Retail Sales, which was the most in two decades, demonstrates the strength of the consumer despite high food and energy prices and a weak housing market.
This surprise increase also confirms the Bank of England's decision to leave rates unchanged so as to prevent a stifling of economic growth. Bond prices fell in the U.K. as traders are placing bets that the BoE will not raise rates until next year.
With U.S. rates falling slightly and U.K. rates rising slightly, the interest rate differential has widened enough to make the Pound more attractive.
Buyers have been supporting the Pound in front of three major bottoms at 1.9362 (05-14-08), 1.9360 (02-2-08) and 1.9336 (01-22-08). A failure to hold 1.9336 will put this pair lower for the year, and may accelerate the market down to the March 7, 2007, bottom at 1.9181.
The GBPUSD closed on the bull side of a down trending angle from the 2.0398 (03-14) top. This price is at 1.9708 today. The strong close has the market in a position to turn the main trend up on a trade through 1.9801. Look for an even stronger acceleration to the upside through 1.9852.
Sellers Hit Swiss Franc Hard
The Swiss Franc traded lower on the news that the Swiss central bank left interest rates unchanged. Because of higher inflation and slowing growth, the Swiss policy makers have limited room to battle inflation and, therefore, have decided to leave the rates unchanged. This forced a massive liquidation by traders who had bet heavily on a rate hike.
The USD/CHF broke right to support inside the 1.0345 to 1.2098 retracement zone where buyers came in with both hands to drive the market higher into the close. This retracement zone remains support all week. On the upside, traders are not expected to get too excited about an uptrend until last week’s high at 1.0541 is taken out.
Inflation News Support Higher Canadian Dollar
The Canadian Dollar maintained its strength against the U.S. Dollar as higher inflation numbers are causing traders to think that the Bank of Canada might have to raise rates later in the year. Higher commodity prices, especially in wheat and crude oil, have been supporting the Canadian Dollar lately.
Despite the selloff the past four days, the USD/CAD is still in an uptrend. A break in the crude oil market may help reestablish the uptrend. Until then, look for a choppy, two-sided trade.
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.
AUD/USD Remains Firm as Interest Rate Differential Makes Aussie Favorable
Traders are shifting their interest to the Aussie because of the higher yield. With U.S. rates dropping this week, traders trying to squeeze out a little more yield have been selling Dollars to buy the AUD/USD.
The longer-term fundamentals still support much lower prices from current levels as the economy is showing signs of cooling off, and the Reserve Bank of Australia is expected to lower rates by December.
Technically, there may be some selling at .the Fib retracement at .9525. Traders will have to watch the action carefully at this price. If the market starts to selloff following a test of this price, then look for the start of a break to .9289 on the next leg down.
Interest Rate Spreads Favor Kiwi over Dollar
With the key New Zealand interest rate pegged at 8.25% and the U.S. rate around 2.0%, traders are buying the Kiwi to take advantage of this favorable spread. Now that the U.S. economy weakened and struggling with economic uncertainties, interest rates have been slowly falling as the pressure to raise has dissipated. This is creating the short-term trading opportunity.
Longer term, however, the weak New Zealand economy is likely to lead to a rate reduction by the Reserve Bank of New Zealand later in the year. With the main trend down, trend traders are just waiting for the right time and place to get short. The charts indicate that .7669 is the first upside objective.
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