Speculators drove the Euro higher on speculation that the European Central Bank would not have to lower rates at its next meeting on June 5. A report citing an unexpected rise in German confidence kicked off a short covering and buying spree on Wednesday.

The FOMC minutes released by the Fed highlighted their concerns about inflation as well as lower unemployment and slower growth in 2008. This pushed the market higher late in the session.

With crude oil ready to overtake $130 per barrel and the Fed unlikely to cut rates along with the ECB, the story unfolding has to be about stagflation. This is a financial condition that develops when growth slows, but inflation rises. This situation would put the Fed in a bad position, as it would have to find a way to stimulate the economy without triggering an inflationary surge.

Without mentioning it specifically, the Fed alluded to this condition by expressing concerns about inflation and rising unemployment. Since it is assumed that the Fed is not going to lower rates at its next meeting on June 25, it will be interesting to see its next move.

The EUR/USD broke through the 50% and .618 retracement price from April 22 top. These prices were 1.5651 and 1.5738. These retracement numbers now become support.

Some traders may read the rally as too much too soon. If this is the case, then be prepared for a possible retracement back to 1.5539.

Traders Bail Out of Stocks; USD/JPY Falls

USD/JPY traders sold Dollars to buy Yen as the U.S. stock market fell sharply on the prospect that higher crude prices would cut into future earnings. The news from the Euro Zone and the Fed's FOMC comments also brought selling pressure to the stock market and the Dollar versus the Yen. Traders sensing financial uncertainty currently desire the safety of the Yen over the potential return of the stock market.

Technically, the pair is in a range with 105.43 and 105.71 two key tops and 102.56 the main bottom. A break through this price will turn the main trend down with downside targets of 101.61 and 100.72. Look for resistance at 104.30.

USD/GBP Stalls Inside Retracement Zone; BOE Less Likely to Cut Rates

The short-covering rally continued in the GBP/USD, but the market stalled inside of a technical retracement zone at 1.9695 to 1.9773. There may be some light selling pressure in this zone because of the short-term overbought condition.

If the selling becomes aggressive, then look for a break back to 1.9548.

Fundamentally, the Pound also firmed as it became more clear based on the Bank of England's minutes from its last meeting that they are likely to keep interest rates at the current level of 5%. The next meeting is on June 5.

Traders Seek the Safety of the Swiss Franc

Traders sold Dollars against the Swiss Franc on Wednesday, as the U.S. stock market broke hard on profit taking due to uncertainty over the U.S. economy and surging crude oil prices. An economic slowdown would be bearish for the economy and lead to lower earnings in the future. Traders currently prefer the safety of the Swiss Franc.

The USD/CHF is in a downtrend. The first downside target is 1.0256. With the trend down, look for resistance at 1.0401 and 1.0501.

USD/CAD Headed Lower on Weakening Economy and Higher Crude Oil

The USD/CAD remained weak as firm crude oil prices helped support the Canadian Dollar. Strength in wheat and gold could also attract new selling pressure to the greenback. The combination of higher commodity prices and an improving Canadian economy have proved bearish for the USD against the Canadian Dollar.

Concerns that the U.S. economy may continue to weaken at a faster pace than the Canadian Dollar also provided support.

There is a cluster of old bottoms at .9796, .9740 and .9709, providing support, which may scare out some of the weaker shorts. With the main trend down, look to sell a retracement to 1.0026.

AUD/USD Traders Target Par

The AUD/USD rallied to another 24-year high. There is now talk that traders will try to drive this market to par with the Dollar. Rising commodity prices, which heavily influence the Aussie economy, is also a bullish factor.

Comments from the Reserve Bank of Australia released earlier in the week indicate that the policymakers are also considering a possible interest rate hike. The RBA meets on June 3.

There is no resistance at this time. Look for support at the old main swing tops at .9544 and .9510 to hold on any weakness.

Potential Upside Breakout at .7734 in NZD/USD

The short-covering rally continued in the NZD/USD as traders try to breakout above a key resistance area at .7734. Although the main trend is still down, the upside momentum has been strong because of strong commodity prices.

Traders seem to be ignoring the weak housing fundamentals, which have brought heavy selling pressure to this market over the past month.

Currently, the market is reaching an important resistance zone at .7737 to .7784. There has been selling on the first test of this level. Overcoming this price zone indicates the buying is strong with the possibility of a rally back to .7827.

With the main trend still down, look for .7696 to hold on a break. This action would be important, as the market needs to make a secondary higher bottom to attract new buyers.

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