With the financial markets in Chicago indicating that the Fed is less likely to cut rates over the near term and the ECB expected to raise rates in July, the EUR/USD is once again showing signs of strength. 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.
Thursday's initial claims and Leading Indicators report will most likely be the catalyst, but traders are going to have to make a decision if the Euro is trading inside the retracement zone. For several months the Euro has been trading inside of the 1.6019 to 1.5283 range. The recent break to 1.5302 was technically a higher-bottom which may be indicating the start of a new leg up.
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.
USD/JPY Falls as Traders Seek a Safe Haven
The USD/JPY could not make a new high for the week through 108.58 as traders backed off after early attempts. Weakness in the U.S. stock market due to more banking credit problems and higher crude oil prices caused traders to dump the Dollar and buy back Yen.
Chart watchers should note that the main trend is up, but overbought. Traders seeking a safe haven could drive this pair down to 106.49 – 105.99 before it finds strong buying. With the main trend up, look for an opportunity to buy in this zone especially at 106.39 if it stabilizes and gets support from the stock market.
Banking Problems in U.S. Weaken Dollar versus Pound
Traders took advantage of a weakening U.S. economic picture and talk of more credit issues at banks to buy the GBP/USD against the Dollar. The U.K. economy is not doing much better than the U.S., but short traders decided to lighten up positions on the bad news.
The Bank of England's Monetary Policy Committee wants growth in the economy, so it is unwilling to raise rates from current levels. Inflation reached its highest level in ten years, but Bank of England Governor Mervyn King remains uncertain about the direction of interest rates. These fundamentals indicate a weaker Pound over the long run, but as long as the Fed’s next move is also uncertain, look for the Pound to gain on the Dollar.
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.
As Financial Turmoil Develops in the U.S. Traders Seek the Safety of the Swiss Franc
Uncertainty in the U.S. economy and a weaker U.S. stock market drove traders to the Swiss Franc on Wednesday as traders sought safety over return. There seems to be a sense of risk aversion developing as the stock market cannot seem to catch any buying.
This is a triple witch week so the direction of the stock market could turn up rather quickly. With this in mind, watch to see how the USD/CHF reacts inside the retracement zone at 1.0345 to 1.0298. There may be buyers waiting down there. 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.
Uncertainty in the U.S. Economy and Higher Crude Oil Supports the Canadian Dollar
The Canadian Dollar rose against the U.S. Dollar as traders sense that the U.S. is showing signs of weakness once again. Higher commodity prices, especially in wheat and crude oil, are also supporting the Canadian Dollar versus the U.S. Dollar.
The charts indicate that the market may have put in a major top at 1.0323. Traders also feel that 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.
Interest Rate Advantage Favors AUD/USD
Although the longer-term fundamentals support much lower prices from current levels as the economy is showing signs of cooling off, the AUD/USD rallied as the interest rate differential widened.
Since the Fed is expected to delay raising interest rates, traders decided to shift there interest to a higher yielding currency.
Technically, there may be some selling at .9487 to .9525. Traders will have to watch the action carefully in this zone. If the market starts to selloff following a test of this zone, then look for a test of .9289 on the next leg down.
Traders Seek Higher Yield; NZD/USD Rallies
Lower rates in the U.S. combined with an oversold condition in the NZD/USD helped trigger a rally on Wednesday. With the key New Zealand interest rate pegged at 8.25 and the U.S. rate around 2.0%; traders bought the Kiwi to take advantage of this spread.
Longer term, however, the weak economy is likely to lead to a rate reduction by the Reserve Bank of New Zealand later in the year. For now, however, traders are going to try to squeeze out as much yield as they can until the rates are lowered.
The charts indicate that .7669 is the first upside objective.
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