Another surge to the upside in gold and renewed buying in Asian stock markets helped drive the Dollar lower overnight as investors once again increased demand for higher yielding assets.

The December Euro is trading higher overnight ahead of this morning’s European Central Bank report.  Most traders have decided that the ECB will leave interest rates unchanged at 1% so the focus will be on ECB President Trichet’s talk at 7:30 a.m. Central Time.  Trichet is expected to outline the ECB’s plan to wind down the billions of Euros of financial stimulus it has provided to the financial system.  

The December British Pound surged to the upside, making a new high for the week, but has since fallen back inside of the key retracement zone at 1.6646 to 1.6575.  Economic reports overnight are signaling that the U.K. is showing signs of improvement but that the road to recovery is likely to remain rough.  A break back under 1.6575 is likely to lead to additional selling pressure.  

The U.S. Dollar is trading higher against the Japanese Yen for the third straight day since the Bank of Japan announced new stimulus measures.  Since the BoJ doesn’t meet formally until December 17th, expectations are for this counter-trend move to continue until then. Traders are pricing in the possibility of an intervention although no formal announcement has been made.  Technical traders should note that this market is likely to continue down until the next retracement area is met at 1.1307 to 1.1195.  This gives this market plenty of room to the downside.

The December Swiss Franc is trading higher because of the increase in demand for higher yielding assets; however, it remains range bound between .9826 and 1.0090.  The fear of another intervention by the Swiss National Bank is helping to curtail the selling pressure.

The main range in the December Canadian Dollar is .9798 to .9212.  This range is creating the retracement zone at .9505 to .9574 which has kept this market in balance for close to a month.  Higher equity prices are helping to buoy the Canadian Dollar, but the lack of direction in the crude oil market is helping to limit gains.  Traders are also fearful about rallying the Canadian Dollar too much out of fear of an intervention by the Bank of Canada.

Greater demand for higher risk from Asia helped drive up U.S. stock index futures overnight.  However, the rally in the December E-mini S&P stopped short of taking out yesterday’s high at 1115.50.  The chart pattern suggests that a rally to 1122.00 is likely as this would represent a 50% correction of the entire break from the October 2007 top to the March 2009 bottom.  

Yesterday the S&P formed a closing price reversal top.  This potentially bearish pattern remains intact until a trade through 1115.50 negates the move.  A trade through 1104.25 is needed to confirm the reversal top which could then trigger a sharp sell-off.

Stronger demand for higher yields is putting pressure on the March Treasuries this morning.  March T-Bond and March T-Note yields are expected to rise as these two debt instruments have to compete with the higher yields offered by the stock market.  Key support in the bonds remains at 120’06.

Strong Asian and European demand helped drive February Gold to a new all-time high overnight.  The weaker Dollar and central bank demand continues to be the catalyst behind this current leg up.  Speculators are also beginning to load up which has put this market in a severely overbought position.  At this time it looks like this market is vulnerable to the downside, but so far no topping signal has been given.  The best suggestion is to trade defensively.

Higher equity prices and a weaker Dollar are helping to boost March crude oil overnight.  This move flies in the face of two bearish inventory reports from earlier this week.  Today’s strength proves that speculators are ignoring the current fundamentals. Watch for a hard break if the Dollar turns around or equity markets reverse the trend.

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