Despite recent talk that the Fed may be ending its cycle of interest rate reductions, there are still concerns in the Forex community that the U.S. economy may not be robust enough to avoid a prolonged economic drawdown or in the worst case, a recession.
A series of U.S. economic reports on Thursday coupled with reports from earlier in the week suggest that there is still weakness in several sectors of the economy despite the Fed's efforts to stimulate the economy.
In Thursday's reports, industrial production indicated some weakness. Industrial capacity failed to meet expectations, and although the Philadelphia Fed number showed some improvement, it was still negative. Finally, jobless claims did not show any improvement.
Bernanke's warning to banks to continue to raise capital because of the possibility of more financial market turmoil is another indication that the financial markets are not improving as fast as the Fed would like to see.
Uncertainty in U.S. Economy Sends Traders to the Yen
The USDJPY failed to punch through the last main top at 105.71 as traders voiced their concerns about the uncertainty that the U.S. economy will avoid a prolonged economic slowdown and sold Dollars to buy Yen.
For the second day in a row, traders appear to be reluctant to buy Dollars at current levels so close to the old top at 105.71. The recent pattern indicates an interest in buying breaks rather than strength. The trend remains up unless 102.56 is violated.
Trichet Caps Euro Rise with Comment
A report showing GDP was up in Germany and France helped support the Euro early in the trading session, but a comment by ECB President Trichet capped the rally.
Trichet commented that despite the gains, the GDP growth pace may not be as strong in the months ahead. Many speculators took this as a warning of impending slower growth and liquidated their long positions.
Unless there is overwhelming news supporting either the Euro or the Dollar, continue to look for range-bound trading.
Technically, the charts indicate that the Euro could break out to the upside on a trade through 1.5595 with 1.5720 a possible target. The downside is vulnerable on a break of 1.5283 with 1.5220 the possible target.
Technical Buying Supports the Pound
Technical buyers are supporting the GBPUSD at current levels in front of three major bottoms at 1.9360, 1.9336 and 1.9181. Wednesday’s reversal up indicated some profit-taking. Today’s follow through to the upside indicates light short-covering.
The Pound may encounter some selling pressure following the first test of 1.9518. A breakout of this level is likely to meet new sellers at 1.9667.
The trend is down, the economy weak and the Bank of England may lower interest rates again. These factors suggest more downside pressure is likely. Wait to sell rallies.
Equity Traders Sell Swiss to Buy Dollars
With traders apparently shifting their strategy from selling Yen to buying equities, the USDCHF rose slightly as traders bought Dollars and sold Swiss to fuel their risk appetite need.
The trading action on Thursday has put the market in a position to reaffirm the uptrend on a breakout over 1.0625. A close over 1.0630 will indicate further strength with a possible upside target of 1.0865.
USDCAD Still Range-bound
The USDCAD continues to trade in a range with a slight bias to the downside due to the surging crude oil market and the strengthening Canadian economy.
The recent stronger than expected economic reports are sending a sign that the Bank of Canada may not have to announce a rate cut at its next meeting on June 10.
Continue to look for sideways trading with par acting as a pivot price. If crude breaks sharply, then look to press the short side.
Bad Retail Sales Sink NZDUSD
The NZDUSD fell as retail sales declined at a faster pace than expected by economists.
The recent sharp selloff in the Kiwi has raised talk of a renewed round of interest rate cuts by the central bank. Financial traders are betting on a quarter to half point reduction within the next 12 months.
Several factors have been adding up which suggest more downside is likely. There has been a decline in consumer spending, lower unemployment and poor housing numbers. All of these factors suggest the economy has stalled.
Technically, the market is oversold. Do not be surprised by a strong short covering rally, but be ready to initiate new shorts if the rally stalls.
Please do not hesitate to contact us at 800-971-2440, with any questions.
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