The U.S. Dollar is slipping a bit against the Euro overnight as it continued to trade inside its almost 60 day range. Although it has been lingering at the top of the range, buyers have been reluctant to buy or sell heavily at this high level. The technical momentum hasn’t been there either to drive it through the high for the year at 1.4327. Buyers have backed away on each approach because no one seems to want to print the high tick without solid evidence the Euro Zone is clearly on the road to recovery.
The recent rally in the September Euro has been driven by gains in the equity markets. Investors have been exiting the safer currencies during this time of stock market expansion. This week’s gains have for the most part been limited by the choppy action in equities, preventing the Euro from surging to the upside. The selling pressure that hits the Euro each time the market approaches the 60 day high could be an indication that equity markets are getting close to a top.
Fed Chairman Bernanke’s comments this week regarding inflation have also put a lid on the Euro. In his testimony before the Senate Banking Committee, Bernanke said that the Fed has the tools to keep inflation at bay. On the other hand, Bernanke provided a little fuel for a Euro rally by stating that the economy’s recovery will be gradual because of rising unemployment.
The key to a prolonged rally in the September Euro will be the direction of interest rates. While Bernanke said the Fed would gradually raise rates after it begins to implement its exit strategy, he did emphasize that it is difficult to pinpoint a time for the move. There are some media analysts who believe we are months or perhaps years from a substantial interest rate hike. Based on this scenario, the Euro should maintain its strength versus the Dollar as long as the European Central Bank doesn’t surprise the market by cutting interest rates.
The real fear for the Dollar bulls should be whether the ECB will raise rates before the Fed does because it tends to see inflation when and where it wants to find it. In addition, they are also pretty quick on the trigger finger when it comes to raising rates. The ECB meets again on August 6th. If the September Euro is still trading inside of the current trading range then a surprise rate hike is exactly the kind of event that will trigger a breakout to the upside.
All you have to do is remember July 2008 when the ECB hiked its benchmark rate the last time. They were the last major central bank to do so while all others were in the midst of a series of cuts.
Baring a substantial break in the stock market, the September Euro is expected to maintain its upside bias as demand for higher risk assets grows. If this pair remains inside of its current range then it may take a surprise interest rate hike to trigger a Euro surge to the upside. Traders should also note that even talk of an interest rate hike could fuel an upside breakout as speculators will buy with both hands.
Other markets ………
The September British Pound is trading better this morning which is probably profit-taking ahead of tomorrow’s Second Quarter Preliminary GDP. The Pound has been feeling downside pressure most of the week on the thought that the economy is still weakening and that the U.K. doesn’t have the room to expand the budget.
The Dollar is stronger versus the Japanese Yen. The overnight strength in the equity markets is pressuring the lower yielding Yen in favor of higher risk investments.
The mixed Dollar is causing mixed results in the August Gold. This market has been holding its own this week while the Dollar weakened despite comments from Fed Chairman Bernanke that interest rates would remain low and inflation under control.
Better earnings from Ford Motors are helping to boost the September E-mini S&P 500 and the Dow this morning, but the big story has been the gains in the September E-mini Nasdaq. This market is in the throngs of an 11-day rally and is showing no signs of a let up. The only concern about current rally is the light volume. Money is being invested by the mutual funds but new money isn’t flowing that fast into these same funds. It appears that investors are still on the sidelines.
The markets will continue to be sensitive to earnings reports the rest of the week. Investors should note that a lot of these companies reporting better than expected earnings are doing so because they have slashed expenses. At some time in the future, the market is going to demand that revenues start to increase.
The first leg of this current rally was probably a relief rally. This current rally is being triggered by cost cutting. The next leg will have to be driven by increased revenues. This may cause the market to retreat if the majority of stocks do not show better revenues. Those that do will rise to the top but may not be enough to boost the indices.
December Wheat is trading a little better this morning following yesterday’s sharp sell-off. Besides improving crop conditions and the potential for a bigger than estimated crop, traders now have to worry about the regulators watching for excessive speculation. If trading curbs are implemented, both soybeans and corn may join wheat in the down slide.

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