The U.S. Dollar is expected to open higher against most majors this morning as demand for risk dropped overnight after European stock markets weakened.  Economic news released last night and early this morning also contributed to movement in the foreign currency markets.

The U.S. Dollar has traded under pressure all week because of increased demand for higher yielding assets.  Much of the rally has been attributed to the fact that the U.S. Dollar is currently the cheapest funding currency.  Record low borrowing costs are contributing to the weakness in the Dollar and the strength in higher yielding assets. Investors have been selling the Dollar to fund their appetite for risk.

Yesterday the Dollar tried to regain some strength late in the trading session following the release of the Fed’s Beige Book but major buyers were noticeably absent driving the Dollar down into the close. The Fed reported in its monthly Beige Book that the U.S. economy was stabilizing or improving.  This positive report was a strong sign that the worst recession in decades was over and that the economy may have turned the corner.  

While the Fed remains “cautiously positive” about the economy, the road to recovery is expected to remain rocky primarily due to flat retail sales and a weak labor market.  The biggest concern for many of the world’s central banks is when to put an end to the stimulus plans which have supported their economies.  This presents the next challenge for the central banks because waiting too long could be inflationary while acting too swiftly could curtail gains.

Early this morning the Bank of England voted to leave its benchmark interest rate unchanged at 0.50%.  In addition, no changes were made to its quantitative easing program.  The big concern for traders was whether the BoE would reduce the interest rate it pays on reserve bank deposits.  The BoE decided to leave this rate unchanged also which helped give the September British Pound a slight rise after the announcement.

Although recent economic reports have presented evidence that the U.K. economy may be stabilizing, the central bank is still concerned that the economy is vulnerable to relapses.  Because of this, the BoE is likely to continue to apply stimulus to the economy to assure that it remains on the path to recovery.  

Technically, the September British Pound is running into resistance inside of a retracement zone formed by the August range.  This zone is 1.6577 to 1.6687.  Yesterday, this currency rose to 1.6625 before attracting selling pressure.  A trade through 1.6627 will turn the main trend to up.

President Obama’s healthcare speech failed to rev-up the equity markets overnight.  The lack of a catalyst to take them to higher levels, however, is most likely having the biggest influence on the market at this time.  Trading has been thin and quiet while volatility has been falling.  This usually indicates that a big move is imminent.  Cycle watchers are looking for a top or volatility to re-emerge between September 11th – 15th.  

Upside momentum stalled in Europe overnight and this condition is spreading to the U.S. markets.  The stronger Dollar may also be signaling that demand for risky assets may be diminishing which could lead to a profit-taking break today.  Traders seem to have been conditioned to buy on dips rather than rallies which usually means a 50% pull-back of the recent rally is likely.  If weakness develops over the next two days, look for the September E-mini S&P 500 to test 50% support at 1013.75.

December Treasury Bonds and Notes are called higher this morning.  Yesterday’s $20 billion 10-year Note auction went off without a hitch.  Last night’s strength could be investors taking protection against a possible break in the stock market.

December Gold is called sharply lower based on the overnight trade.  The stronger Dollar is helping to drive all metal prices lower.  Technical overbought indicators are showing that these markets may have moved too much too fast.  Last night’s break helped to form a new top at 1009.70.  The new downside target for this break is 970.50.  If investors really want gold then look for buyers to step in at this level.

Now that the OPEC meeting has concluded without any major changes, look for December Crude Oil to follow the equity markets for direction.  OPEC ministers agreed to keep production quotas at current levels, but emphasized that price stability will only be possible if all members adhere to these levels.  News that crude oil supply rose unexpectedly by 7.2 million barrels the week-ending September 4th could put pressure on this market.

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