The EUR/USD remained firm all session as Euro Zone CPI was reported higher than expected. This news solidifies the European Central Bank's need to raise interest rates in July.
Adding to the strength in the Euro was a report on New York State manufacturing, which showed a contraction in June. Oil prices surged to close to the $140.00 level. This showed traders that this inflationary situation is still out of control despite Saudi Arabia's announcement to increase daily production by 200,000 barrels per day.
The G-8 nations concluded their meeting over the weekend without issuing a statement supporting a strong Dollar. Given all of the recent talk from the Fed and the U.S. Treasury, traders were all but certain the G-8 would mention the need for a stronger Dollar in its concluding statement. Instead, the G-8 stated that, the world economy continues to face uncertainty, and downside risks persist. Then they added, Elevated commodity prices, especially of oil and food, pose a serious challenge.
While the news from the G-8 was disappointing, it was not a complete disaster as traders still feel that the Fed will support the Dollar by stepping up its assault on inflation by hiking rates. The statement does seem to contradict Fed Chairman Bernanke's announcement last week that economic risks have faded. This contradiction most likely added to some of the bearishness in the Dollar.
Throughout the week, financial traders who bet on the direction of interest rates by committing to spread positions started factoring in the possibility of a rate hike on August 5. The sentiment rose last week from 0% on June 6 to close to 60% on June 13. Traders also increased their bets that the Fed will raise rates in December from 67% to 96%.
Chart watchers are keeping an eye on the March 11 low at 1.5282. If this price is violated, the Euro could accelerate to the downside. Based on the short-term formation, however, the Euro seems poised to rally to 1.5573 – 1.5637 before encountering resistance.
The release of the German ZEW Economic Sentiment early Tuesday morning is likely to set the tone for the day. Traders are looking for confidence to fall to -42.4 from -41.4.
USD/JPY Traders Lighten Up Long Positions
The USD/JPY started out slightly better, but could not gain upside momentum to drive it higher. In a mostly technically based trade, the Dollar closed lower versus the Yen. Rather than wait for news to happen, traders decided to lighten up their long positions at the current level.
Last week the interest rate differential widened as U.S. rates rose sharply higher. Softening interest rates and a mixed stock market on Monday gave long traders an excuse to liquidate long positions. Over the long run, however, the uptrend should continue as the widening interest rate spread will make U.S. denominated assets more attractive.
Chart watchers should note that the top in the USD/JPY at 108.58 stopped just short of the 108.61 (Feb. 14) top. The lower close sets up a reversal top, which could trigger the start of a break to 106.49. This would create a nice buying opportunity as the upside target remains 109.94 by June 20.
Lack of G-8 Support Helps British Pound Rally
An oversold market and the lack of a supportive statement from the G-8 nations helped the GBP/USD rally on Monday. The longer-term trend remains down, as an interest rate hike by the U.S. is likely to continue to put pressure on the Pound.
Traders will be watching Tuesday's U.K. CPI number to gauge the seriousness of the inflation problem. The Bank of England's interpretation of the CPI number will be a key indicator also as it may give clues as to the direction of interest rates.
Buyers came in late last week ahead of three major bottoms at 1.9362 (05-14-08), 1.9360 (02-2-08) and 1.9336 (01-22-08). A failure to hold 1.9336 will put this pair lower for the year, and may accelerate the market down to the March 7, 2007, bottom at 1.9181.
The current chart pattern suggests a 50% retracement of the 1.9801 (06-09-08) to 1.9408 (06-13-08) range to 1.9605 is likely. With the main trend down, look for a selling opportunity on this rally.
Threat of Intervention and Interest Rate Hike is too Much for Swiss Franc
Falling demand and rising inflation led to the first decline in Retail Sales in two years. Traders are using this news to state that the Swiss central bank is likely to leave rates unchanged at its next meeting on June 19. There is talk surfacing, however, that the Swiss bank will most likely raise rates by December due to inflation and low unemployment.
From May 8 to June 9, the USD/CHF fell from 1.0625 to 1.0148. Since June 9, however, this pair has increased to 1.0541 while taking out two tops at 1.0521 and 1.0528. The current break is likely to stop at 1.0344 to 1.0298. With the trend up, watch for a buying opportunity.
The next upside targets are another pair of main tops at 1.0601 and 1.0625. The first major obstacle of this rally is a 50% price a 1.0630.
Crude Oil Surge Helps Canadian Dollar
For the first time in several weeks, a higher crude oil market helped rally the Canadian Dollar versus the U.S. Dollar.
For weeks, this pair had been following the economic reports out of Canada which suggested that the Bank of Canada would have to cut rates by at least 25 basis points. With the ECB and the Fed threatening to hike rates in July, however, the Bank of Canada decided to take a pass this time and left rates unchanged. In fact, the Bank of Canada completely reversed course and is now embarking on a campaign to battle inflation.
This sympathy rally with the crude oil will be closely watched to see if it gains enough momentum to change the USD/CAD trend to down. In the worst-case scenario, the market may retrace 50% of the recent gains. However, the combination of the threat of an intervention and a hike in rates is likely to keep the uptrend in tact and support much a stronger U.S. Dollar over the long run.
AUD/USD Oversold; Short-Covering Rally Likely
Traders probed the long side on Monday as oversold conditions prompted selling to dry up at current price levels. Sellers dominated the AUD/USD all last week as the intervention treat from the U.S. Treasury and the possible rate hike by the Federal Reserve put pressure on the Aussie. Additional weakness was supported by the news that the Australian economy lost the most jobs in 19 months. This was a sign that the economy was slowing down, and that its high interest rates were unwarranted.
The interest rate differential between the Australian and U.S. rates has also been declining. This could cause U.S. investors to pull their money out of high-yielding Australian assets. The late release of the Reserve Bank of Australia notes from the last meeting may set the tone for the overnight trade. Traders will be looking for clues as to how interest rates will be handled over the near term.
Technically, the market is approaching a retracement zone at .9304 to .9221. This is a wide range so the market may take time to develop a bottom before moving higher. .9289 is a main bottom from May 15. Stops are likely hidden under this bottom. Look for acceleration to the downside if this price is violated.
With the main trend down, watch for the market to encounter resistance at .9487. Selling could come in at this price.
NZD/USD Ready for Short-Covering Rally
The NZD/USD reached an oversold condition, and the lack of selling at the current level is likely to trigger a short-covering rally. Watch for a short-covering rally to .7675 for the next selling opportunity. The downside target is .7427. This is a major 50% area.
The interest rate differential has been narrowing indicating that U.S. investors may be cashing in their higher yielding New Zealand counterpart financial instruments. Traders have been taking advantage of the much higher rates in New Zealand versus lower rates in the United States.
New Zealand Governor Bollard implied this week that the record setting rates at 8.25 percent this week might have to come down because the economy needs a stimulus. Although retail sales were up last month, the country is still suffering from high unemployment and a worsening housing market.
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