Poor housing starts and lower than expected industrial production are forcing traders to rethink their position that the Fed will raise rates in June or August. There is even some talk that rates will not rise for at least a year. Some traders are now convinced the Fed will leave rates at current levels until the employment situation turns around. Traders in the financial markets in Chicago lowered the probability that rates would rise in June from 26% to 14%. The probability of a rate hike in August and December was also lowered.
The Euro rallied versus the Dollar as traders took back some of the losses from last week. So far this week, the Dollar has not seen any bullish news, which is making the Dollar bulls nervous. The lack of support from the G-8, and poor economic reports are enough to cause traders to lighten up short positions in the EUR/USD. It looks as if this pair is poised to remain inside of the 1.6019 to 1.5283 range it has traded in for the last two months.
Technically, look for this current rally to reach a retracement area at 1.5573 to 1.5637. With the main trend down, watch for selling pressure.
Light Profit Taking Turns USD/JPY Lower
The USD/JPY followed through to the downside following Monday's rejection of the last main top at 108.61. A mixed stock market and reports that the Fed will not be raising rates this year forced some of the weaker longs out of the market.
Light profit taking seems to be dominating the market, as traders seem content with taking a little off the table following the recent rally from 104.39.
Chart watchers should note that the main trend is up, but overbought. The current pattern suggests a break to 106.49 – 105.99 is likely. Look for a buying opportunity in this zone especially at 106.14.
High Inflation Pressures British Pound
A higher than expected inflation report turned Monday's buyers into sellers as the GBP/USD broke hard on Tuesday. Traders cite the Bank of England's reluctance to raise rates as one of the reasons for the decline. Traders are also taking this as a sign that the economy is weaker than originally thought.
On Tuesday, Bank of England Governor Mervyn King explained that the path to bring inflation with the central bank’s target is uncertain. This comment was made after it was announced that inflation has risen to 4%, its highest level in 10 years.
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.
Mixed Signals Keep USD/CHF in a Range
Mixed signals in the U.S. interest rate market kept the USD/CHF in a tight range on Tuesday. Until traders receive some confirmation from the Fed regarding the short-term direction of interest rates, expect sideways trading.
With the main trend up, look for support at 1.0345 to 1.0298. 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.
Higher Commodity Prices May Provide Support for Canadian Dollar
Higher commodity prices especially in wheat and crude oil are supporting the Canadian Dollar versus the U.S. Dollar. 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.
The main trend is up with a main top formed at 1.0323. 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 is Setting Up for a Selling Opportunity
The longer-term fundamentals support much lower prices from current levels as the economy is showing signs of cooling off. Higher than expected unemployment coupled with the news that the Reserve Bank of Australia is considering a rate cut later in the year has put downside pressure on the Aussie. Also contributing to the bearishness was last week’s threat that the U.S. Treasury would intervene to support the U.S. Dollar.
With the main trend down, look for a rally to .9487 - .9525 to set up the next selling opportunity. The best price to sell is .9508. If the market does not retrace into this zone, then look for acceleration to the downside following a penetration of .9289, with a target of .9083 over the near term.
NZD/USD May Rally to .7669
An oversold condition in the NZD/USD market may trigger a rally to .7669. With the main trend down, look for a selling opportunity if this price is reached. Although the last bottom was .7445, the charts indicate the market is likely to reach .7427 before traders make a more serious attempt to put in a bottom.
Fundamentally, the threat by New Zealand Governor Bollard to lower rates from 8.25 percent is weighing on the market. High unemployment and a weakening housing market are the bearish factors driving this currency lower.
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