The U.S. Dollar is plunging into the close driven sharply lower this late in the session by the news that semiconductor chip maker Intel blew out quarterly revenue and profit guesses in its second-quarter results.
Investor sentiment has turned extremely positive following the release of the Intel data, driving up demand for higher risk currencies. This sharp increase in appetite for risk is likely to set the tone for a further drop in the Dollar overnight and renewed selling pressure if the stock markets open higher in New York tomorrow morning.
Tuesday’s rally was initially led by the British Pound and the commodity-linked currencies. A turnaround early in the trading session also underpinned the Euro after a weaker start.
Traders drove up U.S. equity markets throughout the day in anticipation of Tuesday’s quarterly earnings report from Intel. Equity markets opened higher this morning bolstered by good earnings news from Alcoa and CSX Corp on Monday.
The Euro mounted a strong turnaround after a Moody’s downgrade of Portuguese debt drove it lower overnight. The initial reaction to the news was to the downside, but investors decided to ignore this news and focus on U.S. earnings instead. The fast about-face in the Euro took it through the recent top at 1.2722 following a two-day set-back, leading to a resumption of the uptrend and putting the market back on pace to challenge the major retracement zone at 1.2784 to 1.2998.
A report showing that U.K. inflation had risen prompted the start of a short-covering rally in the British Pound overnight which carried over into the day session. Traders now believe that inflation could become the key issue which derails the U.K. recovery unless the central bank acts upon it. Today’s initial rally indicates that investors may be pricing in a possible rate hike by the Bank of England.
After finding support twice this week on an uptrending Gann angle, the Sterling closed in a position to challenge the recent top at 1.5240. A drive through this level will turn the main trend back to up on the daily chart and set up the market for a further rally to the late April top at 1.5523.
After surprisingly trading lower most of the session, the USD JPY mounted a strong recovery late in the session driven by soaring U.S. equity markets to post a slight gain for the day. With stock markets expected to continue to rally on Wednesday, look for the Dollar/Yen to continue to rally as stock players renew their interest in higher yielding assets and the carry trade.
Strong rallies in equities, crude oil and gold helped push the USD CAD lower on Tuesday. Although the Dollar/CAD is trading inside a broad range, pressure is on this currency pair to drive the market into the lower end of this range.
The AUD USD rallied on Tuesday driven higher by increased appetite for risk. Technically the strong close has put this currency in a position to challenge the .618 retracement level at .8883. A drive through this level should trigger stops and an acceleration to the upside. Strong support is being provided by an uptrending Gann angle currently at .8727.
Since the beginning of the month, following a string of worse-than-expected U.S. economic news, Forex investors have been selling the Dollar. Now, expectations of robust earnings during the second quarter have shifted investor sentiment, pressuring the Dollar even further. With 10-Year Treasuries hovering near 3.00%, investors are hungry for better returns and are flocking to the stock market. Although economic reports have been poor, investor sentiment can be a strong market driver.
After bearish fundamental events in Europe throughout the spring and concerns about China’s growth, foreign investors see great opportunity in the U.S. markets without the high level of risk seen in Asia and Europe. This could help trigger a month long rally in U.S. equities while sending the Dollar spiraling lower until at least the first week in August.
Another key sign in the market today was the turnaround in the Euro following the downgrade of Portugal’s debt. Although this event may have been factored into the market, today’s turnaround served as a sign that market participants are no longer easily rattled by bearish news. The next key event, however, will be the release of the European bank stress tests. Downside momentum may slow in the Dollar a few days leading up to the release of this data, but it seems like it is going to take a blockbuster surprise to derail the Euro at this time.
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