The Retail Sales Report came out stronger than expected. The pre-report guesses were for an increase of 0.5%. The actual report showed a 1% increase. This news kept the Dollar strong all day as it confirmed the Fed's thinking that the economy is improving enough that an interest rate hike is warranted.
Traders are also citing the fact that the G-8 meeting could provide support for the Dollar. Traders expected bullish talk and comments from the participants in the meeting. No one wants to be caught short if a bullish comment comes out of the meeting.
Additional Dollar-friendly news came from ECB Executive Board member Lorenzo Bini Smaghi who told reporters in Milan that policy makers only sent indications for July, not beyond. His comment was similar to that of ECB executive board member Juergen Stark on June 10. Yesterday's late session Euro rally was attributed to an ECB official's comment stating that the interest rate hike in July was going to be the first of a series of hike. It looks as if there is some confusion among ECB members as to the plan of attack and how much of a hike is necessary to stem inflation.
Financial traders who bet on the direction of interest rates by committing to spread positions are already factoring in the possibility of a rate hike on August 5. The sentiment rose from 0% last week to 52%. Traders have also increased their bets that the Fed will raise rates in December from 67% to 96%.
The June Euro showed weakness on Thursday, but held a pair of main bottoms at 1.5364 and 1.5283. Based on the weak close, look for the Euro to test these lows on Friday.
If the market cannot break these bottoms, then do not be surprised by a short-covering rally.
USD/JPY Rally Continues
The USD/JPY through another resistance barrier on Thursday and is now in a position to test a major 50% level at 109.94. There may be profit taking on the first test of this level.
If the market cannot break through 108.59, then look for the start of a break. This break would be necessary to relieve the overbought condition, which has developed during this recent four-day surge. Look to buy this break, as the longer-term fundamentals are bullish.
A strong stock market could help rally this pair also as cost of carry traders would sell the Yen and buy the Dollar in order to participate in the rally.
Stronger than Expected Retail Sales Help Dollar Rise versus Pound
The June British Pound is trading at the low end of its monthly range and in a position to take out a few major support points.
The U.K. economy is still showing weakness while the U.S. economy is flashing signs of recovery. With the ECB and the Fed likely to raise rates next month and in August, and the BoE unable to make an informed decision at this time, look for the GBP/USD to continue to weaken.
This market is trading sideways to lower as traders are defending a series of bottoms at 1.9362 and 1.9336. If these bottoms fail to hold, then the market could drop sharply lower to 1.9181, the March 5, 2007 bottom.
Dollar Moves Higher Versus Swiss Franc with Caution
On Thursday, Forex traders continued to buy the USD/CHF, but with a seemingly small amount of caution. The lack of clarity in the U.S. Stock market appears to be making carry traders hesitant at current levels.
The assumption, which is making the Dollar stronger than the Swiss in the short-term, is that the Fed will raise rates in August. It looks as if this market will trade cautiously to the upside until the Chicago financial markets indicate with more confidence that the rates will rise in August. Currently, the confidence level is only 52%, but this is up from 0% last week.
Two tops at 1.0520 and 1.0525 are providing the resistance. A break through these levels could trigger a rally to1.0630.
Bank of Canada Set to Defend Against Inflation
Since the Bank of Canada did not cut rates as expected earlier this week, financial traders are shifting their positions to reflect a change in policy toward fighting inflation. This action includes the pricing in of a possible interest rate increase. Look for the Canadian Dollar to gain on this news. Expectations are for the USD/CAD to give back at least half of its recent rally.
Australian Dollar Weakens Further
The great sell-off continued in the AUD/USD. Bearish fundamentals triggered the initial selling pressure, but it is the violation of technical support areas, which is helping to trigger the acceleration down. Earlier in the week, Treasury Secretary Paulson gave confidence to short-sellers by suggesting that intervention is an option to help the Dollar.
The charts indicate the potential for a break down to .9083.
Intervention Threat and Possible Interest Rate Hike Pressures NZD/USD
The threat of higher global interest rates coupled with the possibility of a U.S. Treasury intervention should continue to push the NZD/USD lower. Bad unemployment numbers and a weak housing market in New Zealand are also bearish factors. Talk that the Royal Bank of New Zealand is considering a rate cut is also helping to accelerate the move down.
Look to sell rallies following the next short-covering rally for the start of a long-term break. The charts indicate a move to .7427 to .7200 is possible. Look for the short covering to start in this area.
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