After overnight weakness due to concerns over the slowing global economy and the upcoming European bank stress tests, the Euro and British Pound mounted a strong recovery rally and finished the day modestly higher.
On Thursday both the European Central Bank and the Bank of England meet to decide monetary policy. Both central banks are expected to leave interest rates unchanged but the markets could move depending on what is said in the subsequent policy statements and press conferences. Traders will be particularly interested in what ECB President Trichet will have to say about the state of the Euro Zone economy as well as his opinion on the scope of the bank stress tests.
Today’s early strength in the U.S. Dollar and subsequent weakness later in the session is an indication that traders aren’t sure about which fundamental event is driving the markets. Lately it has been the weaker U.S. economic reports that have been sending investors out of the Dollar and into more risky assets. Overnight it was concerns over the weak global economy and the European bank stress tests. Volatility is expected to remain high in the Forex markets as investors wrestle with the soundness of the European bank balance sheets and the potential loss of momentum in the global economy.
The strong rise in the Euro is keeping the uptrend intact. The daily chart indicates that there is plenty of room to the upside with a retracement cluster at 1.2783 the next likely target.
Technically, the British Pound is in an uptrend, controlled by the series of higher tops and higher bottoms. Look for an acceleration to the upside when the swing top at 1.5228 is violated. The weekly chart indicates that this market could be headed toward 1.5635 over the near-term.
The Australian Dollar continued its rally which started on Tuesday following hawkish comments from the Reserve Bank of Australia. The RBA’s policy statement turned around a sluggish market by stating that interest rates are likely to rise despite concerns about inflation and a possible slowdown in the Chinese economy. Greater demand for higher risk assets also fueled today’s rally.
Technically the Aussie is in a strong position to rally further. Today’s close was on a .618 retracement price at .8651, but upside momentum indicates that this potential resistance zone level is not likely to hold. This sets up the market for a further rally to the recent main top at .8858.
The formation of the secondary higher top in the New Zealand Dollar is also a strong indication of higher markets to follow. The Reserve Bank of New Zealand is likely to follow-the direction of the RBA and hike interest rates a second time in as many months when it meets on July 28th. Traders are at least indicating this scenario by covering short-positions in anticipation of another rate hike. Like the Australian Dollar traders, Kiwi traders seem to have a better outlook for China than the rest of the world.
The USD JPY failed in its attempt to make a new move low early this morning. The strong rally in the U.S. equity markets encouraged traders to buy Dollars and sell Yen in a resumption of the carry trade strategy. While a weak outlook for the global economy drove investors into the lower-yielding Yen, a strong earnings-based equity market rally is likely to drive them out of the Yen and back into higher yielding assets.
Don’t expect too much action overnight as traders have pretty much positioned themselves ahead of Thursday morning’s ECB and BoE policy announcements. With both central banks expected to keep interest rates at historically low levels, the movement in these currencies is likely to be delayed until traders hear from the Trichet of the ECB and King of the BoE. Trichet’s comments will be listened to more closely as he has more to comment on. Emphasis will be placed on his assessment of the European bank stress tests. Traders want to hear that Trichet feels the tests will be stringent enough to get a correct risk assessment of the condition of the European bank balance sheets.
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