On Thursday, the U.S. government reported that the gross domestic product was stronger last quarter than initially estimated. This report helped spark an initial break in the EUR/USD. Tumbling crude oil prices later in the morning helped drive the Euro lower.
The reports so far this week show that the U.S. economy is not as weak as expected. There are signs of improvement, which is giving Dollar buyers confidence.
Hawkish comments by the Fed also helped accelerate the break in the Euro. Comments such as inflation expectations should continue to worsen and I would expect a change of course in monetary policy to occur sooner rather than later attributed to Federal Reserve President Richard Fisher, provided fuel for the Dollar's rally.
The Fed appears to be ready to act should inflation begin to affect consumer purchases. U.S. interest rates continued to rise, moving tighter against the Bund. This is sending money to the U.S. markets as global traders seek higher performing assets.
Technically, the market closed inside of a retracement zone at 1.5551 to 1.5487. If downside momentum slows down inside of this range, look for profit taking to begin as it would indicate that sellers are not willing to initiate new positions at this low level. If this becomes the case then wait for a rally back to 1.5653 to initiate new short positions.
USD/JPY Gains on U.S. Asset Buying
Traders seeking a better yield sold the Yen to purchase U.S. assets for a better return. As the U.S. economic picture begins to brighten and crude oil prices tumble, expect more buying in the USD/JPY. Traders have held back on their interest in the long side of this pair because of the uncertainty in the U.S. economy, but this week's reports have given Dollar buyers more confidence to initiate new long positions.
Technically, the USD/JPY broke out to the upside following several days of range bound trading. Once the market clears the two old tops at 105.44 and 105.71, the charts indicate a potential rally to 107.70. Look for the old tops to form a support zone. If this fails to hold, then wait for a pullback to 104.22 to initiate new buys.
GBP/USD Stalls on Strength of U.S. Economic Reports
The British Pound stalled in its attempt to breakout over this week's high at 1.5818. Traders noted the strength in the U.S. GDP number and talk of a Fed interest rate hike later in the year as key factors preventing fresh buying at current levels.
Much of the strength in the Pound recently can be attributed to the financial markets signaling no rate cut by the Bank of England at its next meeting on June 5. Despite low consumer confidence and a tumbling housing market, traders are anticipating an economic recovery in the U.K. much like the recovery in the United States.
On the downside, if the rally fails near 1.9852, then look for the start of a retracement to 1.9607.
Swiss Franc Falls as Confident Traders Seek Higher Yield in U.S. Assets
A stronger than expected U.S. Gross Domestic Product figure for the quarter sent fresh money into U.S. markets as traders sold the Swiss Franc in exchange for higher yielding U.S. assets.
Look for more carry-trade buying in the USD/CHF if oil continues to fall and the stock market continues its strong uptrend. Thursday, the Swiss suffered the biggest loss among the major currencies, indicating that traders were buying with conviction.
The charts indicate more upside potential especially if this pair can close over 1.0495. The next upside target is a pair of old tops at 1.0601 and 1.0625. The clearing out of this resistance zone will be a further sign that major traders have committed to the long side in a big way.
USD/CAD Traders Face Choppy Action
The USD/CAD rallied as the break in crude oil is expected to hurt exports in Canada. With the Canadian economy relying so much on exports such as gold, wheat and crude oil, any sell-off in these commodities directly affects the value of the Canadian Dollar.
On the bullish side, talk is circulating that the Bank of Canada is going to hold off on raising rates at its next meeting on June 10. Furthermore, the strengthening U.S. economy may have a spillover effect on the Canadian economy.
The main concern facing the investor is how much premium has been built into the Canadian Dollar because of the surge in oil prices. The crude oil seems vulnerable for a break back to $100 per barrel, so expectations are for the Canadian Dollar to be hit hard.
Continue to trade the USD/CAD from the long side in expectation of sharply lower crude oil prices. The first upside objective is 1.02.
AUD/USD Poised for a Retracement Down as Buying Spree Stalls
Lower commodity prices are putting pressure on the Aussie. This should trigger a profit-taking break back to at least .9472 to .9429. With the main trend up, this zone should offer the first buying opportunity.
Traders have been unwilling to buy the Aussie at current levels. Once again, the AUD/USD could not take out the nearly 25 year high posted last week at .9655 and backed-off on profit taking.
Longer-term expectations are for the Aussie to take a run at par with the U.S. Dollar later in the year as traders are expected the Reserve Bank of Australia to raise rates. Heavy buying interest from Japan and China is expected to continue following a normal correction.
Fundamentals Remain Bearish for NZD/USD
The NZD/USD failed once again to turn the main trend up by breaking through .7937 and is now in a position to make a 50% correction of its last rally.
The short-term stimulus has been a tax cut, which is expected to flood the New Zealand economy with liquidity. Traders have been reluctant to buy strength at current levels, however, because of other bearish fundamentals such as weak housing and high unemployment still lingering.
Technically, the NZD/USD is under a key support angle at .7896. This technical move has contributed to the selling pressure. The chart pattern suggests that a break to .7729 - .7683 is likely before new counter-trend buyers step in.
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