The U.S. Dollar was under pressure against most majors on Tuesday on speculation the Fed will consider renewing its quantitative easing program following next week’s FOMC meeting on August 10. Another round of weak economic data also contributed to the weakness in the Greenback which drove the Dollar to its lowest level since April against some of the currency pairs.
The Dollar opened lower and remained under pressure throughout the New York session, pressured by weak U.S. consumer spending news, a drop in home sales and a bigger than expected decline in factory orders.
The Greenback’s early morning weakness began following the release of a bearish article by the Wall Street Journal. According to the WSJ, the Fed will consider using cash from maturing mortgage-bond holdings to buy new mortgage or Treasury Bonds instead of allowing its portfolio to shrink. Insiders believe the Fed’s decision will be heavily weighted by this Friday’s U.S. Non-Farm Payrolls Report.
Some investors are questioning whether the Fed will follow-through on this symbolic event. The market has already pushed Treasury yields and mortgage yields to historic lows. Those traders who follow the interest rate differential believe that the Dollar will continue to remain under pressure until interest rates begin to go up. Others believe that eventually the weakening U.S. economy will spread globally, triggering a flight to safety rally into the Dollar.
The Euro and British Pound remained strong throughout the day ahead of the Bank of England and European Central Bank policy meetings on August 5. Both central banks are expected to keep interest rates unchanged.
The BoE will report on the effects of the new austerity measures and tax hikes on current monetary policy. The big issue will be whether these reforms curtail growth. The ECB is likely to issue a statement on the state of the Euro Zone following the recent aid package to countries facing sovereign debt issues. Recently strong economic reports have surprised investors, many of whom believed the economy would slow down due to financial austerity measures.
Technically, the strong close in the Euro has the market in a position to test a long-term downtrending Gann angle from the 1.5144 top at 1.3394. Sellers may step in at this level. The British Pound tested a .618 retracement level at 1.5967. Buying seemed to dry up as the market neared this level indicating that this market may have reached an overbought point.
Speculation that the weak U.S. economy will adversely affect the Canadian economy helped the USD CAD gain ground on Tuesday. The Dollar/CAD traded in a tight range, indicating it may be going through a transition period. Although no bottoming signal has been given, the inability to break this currency pair in the wake of bearish U.S. economic news may be a sign of either a shift in risk sentiment or position squaring ahead of this Friday’s U.S. and Canadian employment data.
The Dollar lost ground to the Japanese Yen despite news that Japanese Minister Yoshihiko Noda said on Tuesday that excessive, disorderly moves in the foreign exchange market were undesirable and that too strong a Yen hurts exports and households. Market participants have heard this line before which may be the reason for the reaction. This form of verbal intervention didn’t work in the past to slow down the strength in the Yen and is not expected to do so now. It seems that only an actual intervention will force the Yen lower.
Finally, last night the Reserve Bank of Australia voted to leave interest rates unchanged at 4.5%. The main reason for this action was inline growth and inflation. The Aussie surged initially on the news but pulled back from its highs throughout the session. The consensus is that the RBA is very content with keeping borrowing costs at current levels until the economic outlook become clearer.
Technically, the closing price reversal may be a sign of a top. The market will have to confirm the pattern with a break through .9070. This could start a 2 to 3 day break.
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