The U.S. Dollar edged slightly higher against most major currencies on Wednesday as investors pared positions in higher risk currencies on economic worries and Spain concerns.
Overnight it was reported that the International Monetary Fund, the European Union and the U.S. Treasury were establishing a line of credit for Spain. This news raised concerns that Euro Zone sovereign debt issues were still out there despite the recent moves by the E.U. to establish stability in the economic region. As a precaution traders pared positions overnight in the Euro and risky assets.
Wednesday morning the U.S. reported that Housing Starts fell 10% in May. This news created worry that the U.S. housing market was headed for a double-dip recession. Stocks broke on the news and the Dollar rallied as traders looked for protection. Later in the morning, a U.S. industrial production report showed a 1.2% rise in May. This news helped stabilize currency markets which led to a midday retracement back to the overnight highs.
After falling to follow-though to the upside after an overnight rally, the EUR USD closed lower for the day. The chart pattern suggests the formation of a weak closing price reversal top pattern. This pattern occurs when the market makes a higher-high, lower-close but the close remains near the high of the day. It may develop into a more serious top, but would have to take out 1.2254 in order to confirm the move. Should weakness develop then look for a break back to at least 1.2114.
The direction in the Euro will be determined by the seriousness of the Spain debt situation. So far officials seem to be taking precautionary measures by establishing a line of credit for the country. Earlier this week, the market absorbed the news that Moody’s was downgrading Greek debt. If investors feel that the move to help Spain is old news then look for the Euro to continue to work higher.
Technically, the Euro is closing in on a main top at 1.2453. A move through this price will turn the main trend up on the daily chart and most likely generate enough upside interest and short-covering to trigger a further move to a 50% price level at 1.2784.
The GBP USD closed sharply lower after posting a new high early in the session. Technically, today’s action appears to be a reaction to the test of a 50% retracement level at 1.4810. The closing price reversal top formation suggests the possibility of a minor retracement to 1.4599 or a major retracement to 1.4541.
A mixed bag of employment data helped trigger the sell-off in the British Pound. This morning it was reported that British workers claiming jobless benefits in May fell by a larger-than-expected amount while the unemployment rate in the three months through April rose to 7.9%.
The slight break in the Euro and technical factors helped drive the USD CHF away from its early session low. Although it still closed lower, the Dollar/Swiss appears to be forming a short-term bottom mainly due to oversold conditions.
This morning the Dollar/Swiss stopped breaking at an uptrending Gann angle at 1.1249 inside of a retracement zone at 1.1326 to 1.1231. Regaining the upper-end of this range will indicate strength and the possible start of a short-covering rally. The near term objective if this case develops will be 1.1489 to 1.1546.
After selling off early in the trading session on renewed Euro Zone debt concerns and weak U.S. economic data, commodity-linked currencies came roaring back at the mid-session only to finish lower for the day.
Following the drop in the Euro overnight and the weaker global equity markets, the Australian, New Zealand and Canadian Dollars were under pressure as traders sold off higher risk assets. The weakness wasn’t a surprise to technical traders who came into the day feeling these markets had reached overbought levels.
After an early set-back driven by the weaker U.S. equity markets, commodity-linked currencies made a comeback as stock prices shrugged off earlier weakness to move higher for the day.
The Australian Dollar tried to breakout to the upside at the mid-session but settled back due to the lack of fresh buying. The daily chart indicates the main trend is up with .8727 the most likely upside target, but conditions could change due to Wednesday’s weak closing price reversal top. If the reversal is confirmed, then watch for the start of a correction back to .8377 to .8307. Traders should watch the Euro and the U.S. equity markets for direction. If risk concerns are renewed in Europe and investors shed risky assets, then look for the start of a retracement.
The New Zealand Dollar turned positive ahead of the mid-session but was unable to hold onto its small gain. Wednesday morning’s weakness triggered a test of a 50% level at .6942 which attracted some buying early. The charts indicate that holding this level is significant because it may set up a test of the .618 level at .7033. The first sign of weakness will be the failure to hold .6942. If this area fails, then look for the start of a break to .6795.
Stronger equity and commodity markets helped support the Canadian Dollar early in the session, but failed to do so into the close. The USD CAD is currently in a position to weaken further after failing to follow-through to the upside following Monday’s closing price reversal bottom at 1.0223. A move through this level could trigger stops and trigger an acceleration to the downside. The last main bottom at 1.0110 remains a potential downside target.
The inability to break through 1.0223 indicates that there may still be some buying interest at this level. The direction of the Dollar/CAD is being controlled by outside markets at this time. Pressure from falling equity and oil prices could help drive the Canadian Dollar lower.
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