The U.S. Dollar finished down against most major currencies on Tuesday as appetite for risk shifted toward higher yielding assets. The Greenback closed lower against the commodity-linked currencies while posting a strong gain versus the British Pound.
The Euro seemed to stabilize after the European Union took steps to prevent sovereign debt issues from spreading and destroying the currency. Nervous shorts appeared to be paring back positions which could be a sign of an impending short-covering rally.
The single-currency briefly pierced the 1.20 area but was unable to attract fresh selling or trigger sell stops. In addition to the austerity measures being proposed by the European Union, the Euro was still finding support from comments by Fed Chairman Bernanke on Monday who said that the EU has the means to stabilize the Euro and enough money to support struggling nations.
The daily chart indicates that the old bottoms at 1.2143 and 1.2153 are a wall of resistance. Overcoming these levels could trigger an acceleration to the upside.
The British Pound was under pressure all trading session before mounting a decent short-covering rally into the close. At this time, this pair is straddling a minor retracement zone at 1.4499 to 1.4435. Holding this area could be a sign of developing strength as it would indicate the formation of a secondary higher bottom.
The weakness in the GBP USD was being driven by comments from Fitch ratings who warned that the U.K. must accelerate its austerity measures or risk losing investor confidence and its AAA debt rating. This warning was nothing new to traders who none-the-less reacted by selling the Pound. The strong comeback late in the session could be a sign that Tuesday’s reaction may have been an overreaction to the Fitch comments.
Risk-linked currencies were strong throughout the trading session. The late session surge in the U.S. equity markets triggered strong short-covering rallies in the AUD USD, NZD USD and USD CAD.
The Australian Dollar was able to rebound off its low following a test of the recent bottom at .8067. Regaining a retracement area at .8251 to .8308 is a sign that shorts may pare back positions again tomorrow. Watch for this pair to try to establish support inside this zone.
The main trend is down in the New Zealand Dollar but Tuesday’s trading action indicates it may have run out of sellers. The strong reversal to the upside indicates there may be a follow-through rally back to a retracement zone at .6735 to .6774.
The choppy trading action in the USD CAD continued on Tuesday on increased appetite for risk. The main trend is up but the market seems content with hovering around the 50% level of the 1.0110 to 1.0853 range at 1.0481. If demand for higher assets continues to increase, then look for more downside pressure on the USD CAD over the near-term.
There seems to be a shift in market sentiment taking place that is centering on the Euro. With Bernanke supporting the actions by the European Union and the EU continuing to develop measures to support the Euro and back the struggling nations, watch for the start of a short-covering rally. A rally in the Euro should take some of the pressure off the commodity-linked currencies, which have been beaten up lately because of trader aversion to risk.
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