The Euro plunged after Fed Chairman Bernanke said the central bank is attentive to the level of the U.S. Dollar.
Traders immediately read this as a sign that the Fed is through cutting interest rates. The Fed Chairman, who rarely comments on matters regarding the Dollar, also commented that the Fed is aware of the effect a weaker Dollar has on rising crude oil prices and inflation. The Chairman also emphasized that the Fed is working with the Treasury on this matter. Earlier this week Treasury Secretary Henry Paulson made a statement backing a stronger Dollar.
Tuesday was a significant day as far as the direction of the Dollar is concerned. The news is clear that the Fed is aware of the relationship between inflation and the Dollar, and is prepared to act accordingly should inflation start to get out of control.
Large traders seem to have known this for over a month as there have been reports that large hedge funds have been on the long side of the Dollar. Dollar futures have also seen a shift to net long in the Commitment of Traders Report.
Technically, a new main top was formed at 1.5627. The market also broke a pair of up trending support angles at 1.5473 and 1.5449. This action indicates weakness and a possible further decline to the main bottom at 1.5283 and another up trending support angle at 1.5277. Look for resistance at 1.5578.
The European Central Bank meets on June 5. Traders are expecting the ECB to keep rates at 4%. Although the Fed's comments should attract more selling, trading may become more subdued until after the ECB's meeting. In addition, lower yields in U.S. Treasuries may also curtail some of the downside activity.
USD/JPY in Position to Resume Uptrend
The USD/JPY found support at a key 50% level and rallied sharply higher, putting it in a position to challenge the recent top at 105.88. A breakout over this level is likely to trigger an even further rally to 107.51.
Fundamentally, the signals are mixed. The Fed's comments provided the support and the power to drive this pair higher, but the weakening stock market prevented more of a rally due to cost of carry liquidation. Look for the Fed's comments to prevail over the long run.
With the main trend up, look to be a buyer as long as the market stays above 104.97.
Inflationary Pressures Lead Bank of England to Leave Rates Unchanged
Despite an extremely weak housing industry and lower consumer confidence, the Bank of England is expected to leave interest rates unchanged at 5% at its next meeting on June 5.
Taking a cue from the Fed, the BOE is most likely thinking that the worst of the financial crisis is over and that the real enemy at this time is inflation. The U.K., like the U.S., has been struggling with higher food and energy prices, which has hurt consumer spending and confidence.
The GBP/USD has been trading inside of a 1.9362 to 1.9852 range with retracement points at 1.9607 and 1.9549. In addition, the market is finding support on an uptrend line at 1.9662. Weakness could develop in this area if the angle cannot hold as support. The next downside target is 1.9512.
On the upside, with the main trend down, look for resistance at 1.9707 and 1.9818.
Inflation Rises; Traders Call for Higher Rates Later in the Year
The fundamentals are mixed in the USD/CHF market. This pair fell on weakness in the stock market, but rallied on bullish comments from Bernanke. Inflation also rose in Switzerland. Financial market traders gave indications of the potential for an interest rate hike later in the year.
Technically, the market is ping-ponging between a pair of trend lines. On the upside, look for resistance at 1.0465. Support is at 1.0277. With a bias to the upside, look for a strong breakout rally through this price to 1.0630.
USD/CAD Rallies as Fed Comments
The USD/CAD rallied on follow-through buying as the Fed's comments gave signals to traders that U.S. interest rates are likely to be unchanged while the Bank of Canada considers a 25 to 50 basis point reduction. This interest differential is favoring the U.S. Dollar as traders may be attracted to the higher yield.
With the Fed emphasizing its fight with inflation, Canada's economy may suffer a setback since a large portion of its economy is based on commodities such as oil and gold. If these two commodities decline, then the economy may also weaken.
RBA Leaves Rates Unchanged
The Reserve Bank of Australia decided to leave interest rates unchanged at 7.25 percent as previous rate increases have caused a moderation in demand.
The RBA deemed the interest rate level as appropriate for the time being given the current economic condition in the country.
Technically, this pair is trading between two retracement zones at .9578 to .9596 and .9472 to .9429. The main trend is up so it is going to be important for this market to hold the break to .9472 to .9429. If this area cannot hold, then look for this to be a signal of a major top formation.
NZD/USD Falls as Royal Bank of New Zealand Hints at a Rate Cut
Speculation is increasing that the Royal Bank of New Zealand will lower borrowing costs from the current 8.25 percent.
Lower rates are expected to act as a stimulus to the economy, which is suffering from high unemployment and a weak housing market.
The charts indicate that a break out over .7922 will turn the main trend to up. Until this happens, continue to trade the short side. This current break is likely to reach .7729 in the short run.
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