Wednesday's trading action is a sign that the Forex markets believe that the Fed move on Tuesday means nothing to the value of the Dollar. Currently the Fed is fighting and losing three battles against a recession, inflation and a credit crunch. Tuesday action was geared more toward the credit crunch than improving the economy. On Wednesday after fully digesting the Fed's activity, traders decided that it meant nothing and pounded the Dollar. The market is now trading as if the Fed has to cut rates another 75 bp on March 18.
Long Euro traders conceded Tuesday to the Dollar bottom pickers only to set up additional longs at better prices on Wednesday. After having the chance to study the Fedâ€™s action, major players determined that the injection of $200 billion was a means to provide liquidity to alleviate the credit crunch and was not a substitute for an interest rate cut. Smart traders returned to the fundamentals of watching the interest rate differentials and went long the Euro in a big way.
Using words as a weapon, ECB president Trichet said he is alarmed by the excessive movement of currencies. He is concerned about the level of the Euro and is trying to use the cheapest way possible to talk it down. The next move would be an intervention, which would be costly. Finally, the third move would be an interest rate cut, which could be inflationary. The problem is not the strong Euro but the weak Dollar. The longer-term solution to the problem of a weak U.S. Dollar versus the Euro is an interest rate cut by the ECB. This is unlikely, however, as their mandate is to fight inflation.
Trichet seems to be stepping up his commentary by voicing his concern for the second time in a week. Perhaps he suspects that exports are already being negatively affected by the strong Euro. So far, Eurozone economic reports do not support this weakness; however, it may show up before the next ECB meeting. If it does, then the ECB will have to take some action.
EURUSD: The surge in the Euro makes 1.533 the new main bottom. Swing traders should bring up their stops from under 1.44 to under 1.533. Once again, the daily reversal top was not confirmed by a follow through break. There is no resistance at this time. The Euro also regained an uptrending angle at 1.543. Use a pullback to this angle as an entry point. The Euro is still vulnerable to a daily reversal down, but without a follow through break, it really means nothing to the short-term uptrend.
GBPUSD: The GBP showed some early weakness when the UK government announced that it would raise taxes and borrow an additional 20 billion pounds in the next four fiscal years. This triggered the biggest break in UK bonds in a decade.
Wednesday's action makes 1.999 a new main bottom. The trend turns to down through this price. The GBPUSD completed a 50% retracement of the 2.11 to 1.93 range on the rally to 2.0249. Additional resistance is at 2.0271. A breakout over the 50% and resistance could trigger a further rally to the .618 number at 2.04. Stay long using a break through 1.999 as your out. Additional support is at 2.00.
USDJPY: Losses in the U.S. credit markets are causing investors to by Yen to pay back borrowed money. Unless the U.S. stock markets can change trend to up and rally out of here, look for more downside pressure in the Dollar.
The USDJPY could not follow through to the upside following Tuesday's sharp rally and is now poised to break through the low for the week at 101.40. Down trending resistance is at 103.61 today. There could be a technical bounce at 100.91 and 100.64. The best indication of a change in trend will be a close over 103.61.
USDCHF: The Bank of America is predicting that the weak U.S. economy will prompt investors to stay away from the U.S. Dollar. The Swiss Franc remains a safe haven for those who want to avoid risk in the equity markets. The rally in the Dollar on Tuesday was expected to be short-lived as the Fed move is going to take a while to show up in economic reports and is not a cure-all for the economy. The main trend continued down with the new main top forming at 1.035. The only way to turn the main trend to up is through this price. The USDCHF hit a down trending resistance angle at 1.0267 on Wednesday. Continue to stay short unless the market trades through 1.035. Look for the next move take this pair to 1.00.
USDCAD: The Canadian Dollar rose against the USD in anticipation of lower interest rates in the U.S. Despite strong domestic spending, a strong labor market, an improving surplus and a hot housing market, there is still a fear that the bad U.S. economy will drag down the Canadian economy. This is the main reason the Canadian has not rallied much against the Dollar.
The USDCAD is still in a tight range with a slight bias to the downside as long as the two tops at .9976 and .9981 hold as resistance. The bottoms at .9710 and .9736 are support. Let the market show you which way it wants to move. Otherwise, buy close to the bottoms and sell close to the two tops, but be prepared to play for a volatile breakout in either direction.
AUDUSD: Consumer confidence fell to its lowest level in 15 years prompting fear that the AUD may be topping. For much of the session the AUD traded higher as investors sought out the higher Australian interest rates. The trend is still up and a new higher minor bottom has been formed at .9147. The short-term range is .9499 to .9147 with retracement resistance at .9323 and .9365. Wednesdayâ€™s action hit the Fib retracement at .9365 and backed off slightly. Additional resistance is at .9399. In the short run, the AUD may pull back to .9257. If it is going to resume the uptrend, then it has to attract buyers at 9257. If this price fails, then the market is weak.
NZDUSD: The main trend is still up. A new main bottom has been formed at .7874. Based on the short-term range, a retracement zone has formed between .8045 and .8085. The rally completed a .618 retracement to .8085. Additional resistance is at .8105. If this was just a retracement then look for a lower bottom today with a possible break over the near term to .7744 over the next 7 to 10 days. A close over .8085 is bullish.
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