Poor economic reports kept the U.S. Dollar on the defensive all week allowing the Euro to retrace more than 50% of the previous week's rally. The financial markets in Chicago are indicating that the Fed is less likely to cut rates over the near term and the ECB expected to raise rates in July. This anticipated action has widened the interest rate spread, making the Euro more attractive.
The key area to watch is 1.5573 to 1.5637. On Friday, the Euro traded 1.5651, but backed off below the upper end of the resistance zone. This area is a battleground and controls the short-term direction of the market.
In order to create a bullish scenario, strong buying has to come in to thrust this market through the upper end of the retracement zone at 1.5637. If heavy selling surfaces, then look for another down leg to begin with momentum likely to push through 1.5282 this time.
Trading maybe tight and directionless as the Fed meets next week on June 24 and 25.
USD/JPY Feels the Pressure of Uncertain U.S. Economy
The USD/JPY suffered another loss as the market closed lower for the week. The lack of confidence in the U.S. economy has caused traders to reconsider aggressively buying this pair at current levels. Uncertainty regarding the financial sector appears to be the force driving this market lower. With Citigroup warning of more potential subprime losses and insurers receiving downgrades, traders are seeking the safety of the Yen. Traders were more risk adverse this week. Look for this to continue into next week as the charts indicate the potential for more selling.
All week this market had trouble breaking Monday's high at 108.58 and the February top at 108.61. Chart watchers are looking for this correction to finish at 106.49 to 105.99. A correction into this area is likely to attract buyers.
Retail Sales Report Continues to Drive British Pound Higher
The GBP/USD continued its strong rally set in motion by Thursday's better than expected Retail Sales Report. Although technically still in a downtrend, the strong close stopped just short of taking out the last main top at 1.9801 and turning the main trend to up.
The strong Retail Sales Report confirmed the Bank of England's decision to leave rates unchanged as to prevent a stifling of economic growth. Bond prices also fell in the U.K. as traders are placing bets that the BoE will not raise rates until next year.
With U.S. rates falling slightly and U.K. rates rising slightly, the interest rate differential has widened enough to make the Pound more attractive.
The GBPUSD closed the week on the bull side of a down trending angle from the 2.0398 (03-14) top. If the market takes out 1.9801, look for an even stronger acceleration to the upside through 1.9852 with 1.9880 the first objective.
Financial Turmoil Leads to USD/CHF Break
Traders seeking a safe haven from U.S. financial market turmoil sold Dollars and bought the Swiss Franc on Friday. Earlier in the week, the Swiss Franc traded lower on the news that the Swiss central bank left interest rates unchanged. This news was largely ignored as traders decided to focus instead on the lingering subprime news in the U.S. News of another write down from Citigroup is the recent cause of the weakness in the financial sector.
The USD/CHF broke into a support zone at 1.0345 to 1.2098 Based on the strong downside momentum; traders are expecting this area of support to fail early next week.
Weak U.S. Economy Along With Higher Commodity Prices Leads to Selling Pressure in USD/CAD
In a move which started the previous week, the Canadian Dollar maintained its strength against the U.S. Dollar as higher inflation numbers are causing traders to think that the Bank of Canada might have to raise rates later in the year. Higher commodity prices coupled with weaker than expected economic news out of the U.S. are also driving forces behind this latest break.
The charts indicate that the market may have put in a major top at 1.0323. Traders also feel that the inability of the USD/CAD to penetrate 1.0350 on the last rally is sign that the market has run out of buyers.
Based on the last rally, the market is expected to correct back to 1.0071 – 1.0011 before new buyers step in. Look to sell rallies with exits above 1.0323.
Higher Interest Rates in Australia Lead Traders to Seek Better Yields
Traders are shifting their interest to the Aussie because of the higher yield. With U.S. rates dropping this week, traders trying to squeeze out a little more yield have been selling Dollars to buy the AUD/USD.
The longer-term fundamentals still support much lower prices from current levels as the economy is showing signs of cooling off, and the Reserve Bank of Australia is expected to lower rates by December.
The charts are indicating a possible test of the last main top at .9646, as upside momentum has driven this market beyond the retracement zone. Unless the U.S. economy starts to show signs of improvement, or the Fed gives hints of a rate hike, look for this uptrend to continue.
Yield Chasers Drive NZD/USD Higher
Despite a weak economy, the NZD/USD rallied all week as traders sought the higher yielding Kiwi. With the key New Zealand interest rate pegged at 8.25% and the U.S. rate around 2.0%, traders are buying the Kiwi to take advantage of this favorable spread. Now that the U.S. economy has weakened and is struggling with economic uncertainties, interest rates have been slowing falling as the pressure to raise has dissipated. This is creating the short-term trading opportunity.
Longer term, however, the weak New Zealand economy is likely to lead to a rate reduction by the Reserve Bank of New Zealand later in the year. With the main trend down, trend traders are just waiting for the right time and place to get short. The charts indicate that .7669 is the first upside objective.
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