An early morning rally in U.S. equity markets sparked a strong surge in Forex markets on Wednesday but a late session break has many traders wondering if today€™s rally was just short-covering.
Today's equity market rally began when better than expected earnings from Macy's and Toll Brothers may have caught traders by surprise. This triggered a short-covering response in the thinly traded Forex markets. Based on the overnight action, it looked as if traders had taken the day off ahead of the FOMC meeting.
Although the rallies in the Forex market merely amounted to retracements of the recent declines, they demonstrate how fast these markets can turn without much news when there are no major stoppers in the market.
Even though the Dollar weakened immediately following the FOMC announcement, by the end of the day the markets had settled down, leaving open the possibility that today's rally may have been short-covering in a thinly traded session. The inability to confirm a short-term top in the Dollar tomorrow will be an indication that the Greenback is poised to move higher.
Despite today's rally, the GBP USD remained in a position to break further following last week's news that the Bank of England will expand its quantitative easing program. This bearish fundamental news coupled with the technical closing price reversal top indicates the potential for more downside action. Today's rally amounted to a retrace of the break from last week's top. If the Pound cannot break through this retracement zone then look for the selling pressure to resume.
The Fed said nothing today that would make me think that the U.S. economy is not on a pace to recover from the recession faster than the Euro Zone. Based on this conclusion, the EUR USD is going to have to offer me more proof that this market is set up to take out last week's high. Today€™s rally looked like a short-covering rally triggered by a surge in U.S. equity markets. Watch for sellers to show up near the 50% retracement zone of the recent break.
The USD CAD corrected 50% of the recent rally to 1.0853. This move is a normal part of the bottoming process. First the market posts a reversal bottom then a short-covering rally ensues. The next move down is usually 50% of the first leg up. If this market is truly bottoming like the fundamentals and the chart pattern suggests, then fresh buyers should start to come in somewhere between 1.0853 and 1.0800. New buying at current levels will help form a secondary higher bottom and could launch the start of a strong rally to 1.1177.
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