Although the European Central Bank is not going to meet until June 5, bullish Dollar traders were reluctant to add to their positions ahead of the meeting. Traders are expecting the ECB to keep rates at 4%, but they will be closely monitoring the comments after the meeting to see if there was any dissension among the group regarding the direction of interest rates in the futures. Traders will also be looking for any change in the hawkish posture that the ECB has adopted in the year since its last rate hike in June 2007.
Citing the potential of higher inflation in the Euro Zone, the ECB has not lowered interest rates in the past year, unlike the other major economies. The ECB remains firm in its mandate to get inflation down to 2%. Although this seems like an impossibility due to the rapid global rise in food and energy prices, it seems to be happy with the results it has achieved up to this point.
Recent retail reports indicating a slowdown and a drop in consumer confidence may also be addressed in the post-meeting dialogue. The ECB has shrugged off these reports, but any indication that a trend is developing could help the Dollar rally later in the year.
Technically, the market is slightly oversold. Beginning Sunday night and continuing into the New York session, the market traded inside of a retracement zone at 1.5551 to 1.5487. Once it was clear that this area was going to hold as support, the EUR/USD rallied to confirm the May 30 minor reversal bottom at 1.5461.
Based on the current formation, do not be surprised if the market rallies back to 1.5639 – 1.5681 into the report on June 5.
Economic Uncertainty Drives Traders Back to Yen
Just when it looked as if the USD/JPY is poised to move higher through 106.00, the strong break may now be threatening to take out major short term support at 102.72 to 102.56 due to the fear that the U.S. economy is still on shaky ground. The Dollar bulls lightened up their positions as their appetite for Dollar-denominated assets waned following the announcement of downgrades in the banking and brokerage sector.
On Monday, the S&P Corporation, because of financial market risk exposure, lowered credit ratings at Morgan Stanley, Merrill Lynch and Lehman Brothers. More downside is expected in these stocks prompting speculation that the bottom of the credit crisis is still not in sight.
Traders sold Dollars against the Yen because of economic uncertainty. Fear sometimes drives these markets, and right now, the fear is risk exposure. Traders are nervous about holding too many Dollar-denominated assets. Because market conditions can shift quickly, traders are not willing to take a wait-and-see attitude, but instead choose to take action on the first sign of a potential problem.
Technically, no damage was done to the USD/JPY chart as the market settled into a retracement zone at 104.29 to 103.92. The uptrend remains intact unless the bottoms at 102.72 to 102.56 are violated. If buyers step into this support zone and the fundamentals are supportive, then look for a minimum retracement back to 104.94 – 105.16.
GBP/USD Falls as U.K. Lender Sells Equity Stake to Raise Capital
The British Pound weakened overnight against the Dollar after the U.K's biggest mortgage lender to property owners said it would sell a portion of its equity at a sizeable discount. During the New York trading session, however, there was not much follow- through selling and the market settled slightly above the low.
The U.K. seems to be experiencing symptoms similar to what the U.S. economy was experiencing several months ago. This means that the U.K. economy still needs time to recover.
In related news, the Bank of England is expected to keep interest rates at 5% at its next meeting on June 5. Although it would like to stimulate the housing industry with another rate cut, the current focus has shifted to fighting inflation due to the global rise in food and energy prices. Inflationary fears are prompting financial traders to price in several rate hikes over the rest of the year.
The charts indicate the GBP/USD found support at the 50% price of the 1.9362 to 1.9852 range. This key support zone is at 1.9607 to 1.9549. If this pair is going to show any kind of strength over the near term, it has to rally from this zone or face more selling pressure down to the lower for the year at 1.9336. If this retracement area holds, and the market establishes support then look for a possible rally to 1.9724.
Risk Adverse Traders Sell USD/CHF
On Monday, traders sold the USD/CHF to lighten up on long positions established last week. Although the rally was strong last week, this pair was never able to attract enough buying interest to turn the main trend up.
Economic uncertainty in the credit markets convinced longs that the banking crisis is still providing a negative tone to the financial markets. With the global financial markets still sensitive to bad news, traders chose to lighten up longs or in this case perhaps add to shorts by selling Dollars and buying Swiss Francs.
The charts indicate the market is inside of a range of 1.0215 to 1.0527. Monday’s break took the market back down to 1.0371 – 1.0334. The bigger picture is showing a second lower top, which is potentially bearish. A break through 1.0215 reaffirms the downtrend.
The strategy is to sell rallies with an out over 1.0630 for longer-term traders. Short-term traders are likely to continue to buy breaks as the overall strength in the Dollar continues to firm.
USD/CAD Climbs Higher; Bank of Canada Expected to Lower Rates 50 Basis Points
The USD/CAD rallied on follow-through buying following last week's report showing the Canadian economy grew less than expected. The economy surprisingly fell from up 0.8 percent to up 0.3 percent break.
The market is now expecting the Bank of Canada to cut rates by 50 basis points at its next meeting on June 10. The financial markets are pricing in a further 25 basis point reduction later in the year.
This contraction in the economy combined with a potential top and subsequent hard break in crude oil, may bring heavy selling into the market the rest of this week. The charts indicate a minimum rally to 1.02 over the short term. The market is expected to stay range bound, however, as it has been the whole year because of the strength in crude oil. This may keep aggressive buyers out of the market until certain that crude has topped.
AUD/USD Weakens on Poor Retail Number
Besides, the lower commodity prices pressuring the Aussie, Monday's lower retail sales brought in more sellers. This report may be the first sign that the string of interest rate hikes earlier in the year may finally be working. During the first quarter, the Reserve Bank of Australia hiked rates in order to curtail an out of control growth rate. It now appears that its aggressive action has circulated through the economy and produced the results it has been looking for.
Technically, this pair is trading between two retracement zones at .9578 to .9596 and .9472 to .9429. The main trend is up so it is going to be important for this market to hold the break to .9472 to .9429. If this area cannot hold, then look for this to be a signal of a major top formation. If strong buying comes in at this price zone, then look for the market to take another shot at new 25-year highs.
NZD/USD Chart Pattern Improves
The New Zealand Dollar traded firm against the U.S. Dollar on Monday. Traders cite the lack of bearish news for the small rally. The market has been trading firm since last month's announcement of major tax cuts. This news is a long-term fundamental, which is expected to provide stimulus to an ailing economy. Currently the economy is suffering from high unemployment and a weak housing market. The selloff in wheat and precious metals has also been putting pressure on the downside.
The charts indicate developing strength as the market was not even weak enough to correct back 50% of its last rally before new buyers came in. This price zone was .9729 to .7684. The current upside target is .7844 to .7863. Regaining this zone could trigger another attempt to turn the main trend up on a move through .7922.
The NZD/USD could not change the trend to up this week despite several opportunities to break out over .7937. The chart pattern is now suggesting a minimum break back to .7729 - .7683.
Despite the attempt to stimulate the economy with a tax cut, traders have been reluctant to buy strength at current levels because bearish fundamentals such as weak housing and high unemployment still lingering.
Trend traders can stay short as the chart pattern and the fundamentals support a renewal of the downtrend. Counter-trend traders can look for a quick rally if .7792 to .7683 holds as support.
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