The EUR/USD fell on Thursday after oil prices eased substantially and traders increased bets that the Fed would most likely raise rates later in the year.
Crude oil surged overnight, but began to weaken as profit-takers came into the market when buyers dried up. The almost vertical rise this past week made traders realize that the market may have risen too much too soon. This break eased inflationary pressures, and traders who bought the Euro as a hedge against inflation lightened up their positions.
Given some time to digest the Fed's latest FOMC minutes, financial traders in Chicago are now indicating a 92 percent chance the Fed will keep rates the same on June 25. Traders, however, increased the chance of a 25 basis point hike at the September 16 meeting from 21 percent to 32 percent.
Although the Fed said in the minutes that it is not inclined to cut rates, its concerns about stemming inflation are almost a sure sign that it will have to raise rates later in the year. The battle is to control inflation in some way without disrupting any developing economic growth.
Besides its battle with inflation, the Fed is also concerned with higher unemployment. In its minutes, the Fed also lowered its expectations for U.S. economic growth.
Technically the Euro is in an uptrend, however, the recent rally has put the market in an overbought position. The quick mover also exceeded key retracement points on the charts.
Thursday's action has the Euro in a position to post a closing price reversal down. Based on the short-term range of 1.5283 to 1.5815, look for a correction back to 1.5549.
USD/JPY Range Bound; Stock Market Rise Provides Support
USD/JPY remained in a tight range between 102.56 and 105.43. Traders have been indecisive about the direction of the U.S. economy and have chosen to keep the market in a range until the situation becomes clearer.
When there is uncertainty and risk, traders have bought the Yen for its safety. As the stock market firms because of easing tensions, the Dollar has been the currency of choice.
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.
Better Retail Sales Help Support GBP/USD
The short-covering rally continued in the GBP/USD as this rally, although strong, has not taken out any significant tops. Right now, it looks like a technical retracement, but the rally could accelerate higher if the market can break through 2.0027. Look for sellers at this price if or when the market gets there.
The market has become overbought, but has given no indications of topping action yet. A top near 1.9851 could start a decline back to 1.9607.
Fundamentally, the Pound firmed on Thursday as U.K. retail sales declined less than forecast in April.
Interest rates in the U.K. also inverted, indicating that chances are remote that the Bank of England would cut rates at its next meeting on June 5. Two-year gilts are now yielding more than 10-year gilts.
Gilt traders in the U.K. have given the Bank of England a less than 1 percent chance of lowering rates. Interest rates are indicating that the BoE will be firm in handling the rising inflation situation.
Profit Taking and Short-Covering Drives USD/CHF Higher
Traders took profit in the USD/CHF after several days of selling pressure. Tension eased on Wall Street giving the shorts an excuse to book the profit after the main trend turned down on Wednesday.
Although the trade was firm, it is going to take some time to form a bottom to trigger new buying. At this time, trade the long side cautiously as another rally in crude oil could lead to more selling in the stock market. This action would put pressure on the Dollar versus the Swiss as traders seek the safety of the Swiss Franc.
USD/CAD Rallies as Crude Oil Weakens
The USD/CAD posted a strong rally on Thursday when crude oil could not hold on to gains. With the Canadian economy relying heavily on exports, any weakness in crude oil is considered bearish for the Canadian Dollar.
Thursday's break was short covering as the main trend is still down. Look for a 2-3 day rally before reconsidering the short side.
AUD/USD Traders Target Par; RBA Considers Interest Rate Hike
The AUD/USD rallied to another 24-year high before posting a reversal down. Although a reversal top is often indicative of a top, this one may only be a 2 to 3 day break as perceptions are the longer-term trend is indicating a move to par.
Rising commodity prices, which heavily influence the Aussie economy, have been a bullish factor. Talk of another interest rate hike by the Reserve Bank of Australia has also been supportive.
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 true resistance at this time, but eventually buying will just dry up at current levels. Look for support at the old main swing tops at .9544 and .9510 to hold on any weakness.
NZD/USD Breaks Resistance on Tax Cuts
The short-covering rally continued in the NZD/USD as traders pushed the market through resistance at .7734 on the news that tax rates would be cut.
Finance Minister Michael Cullen cut taxes to provide a stimulus to the economy. This action is intended to increase liquidity so that the Reserve Bank of New Zealand could avoid cutting interest rates, which would further weaken the grossly oversold currency.
This action is considered supportive to the economy and gave shorts an excuse to pull in their profits. This first rally up from the .7536 bottom should be considered short covering and not new buying. Watch for a reversal top and a correction to buy.
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