Oversold conditions and the lack of fresh bearish news helped the Euro turn around and close higher for the day. Fundamentally, nothing happened to change the minds of traders. Investors are still concerned that the European Union is not doing enough to fix the financial problems in the Euro Zone. The lack of confidence in the European Union continues to remain the major reason behind the selling. Investors want clarity not just ideas from the EU. This would include the implementation of new austerity measures by the five countries at the center of the financial problems: Portugal, Italy, Ireland, Greece and Spain.
Technically, the EUR USD made a daily closing price reversal bottom at 1.2233. A confirmation of this formation on Tuesday could trigger the start of a rally to 1.2787 to 1.2918. A rally into this zone will not be a change in trend, but is likely to attract fresh selling pressure.
The USD CHF posted a daily closing price reversal top. This type of formation sets up a possible correction back to 1.1184 to 1.1123. The direction of the Euro will dictate the movement in the Dollar/Swiss.
The recent divestment out of the Euro is putting strong appreciation pressure on the Swiss Franc. The Swiss National Bank fears that continuous selling pressure will hurt price stability and put the Swiss economy at risk. The main concern is that damage to the export market will stall the economy. SNB President promised to act in a decisive manner which could mean another round of interventions.
The British Pound was under pressure throughout the day, but still managed to close off its low. Bearish talk was circulating that the previous government pushed through spending measures which will make the new government’s attempts to cut the U.K. deficit and balance the budget more difficult. Pressure is likely to remain on the GBP USD as the new government is likely to propose severe budget cuts and tax increases which could put a strain on the economy.
Like the Euro and Swiss Franc, conditions are oversold which could mean the start of a 2 to 3 day short-covering rally. Unless there is fresh news regarding the economy, traders should be careful about shorting the Pound at current levels.
A late session turnaround in the U.S. equity markets helped turn the USD JPY higher. Earlier in the session, the Dollar/Yen was under pressure because of risk concerns. Once the Euro and stock markets bottomed, traders started to pare their positions in the lower yielding Japanese Yen.
The USD CAD rallied Monday morning but ran into resistance at a 50% price level at 1.0424. The minor reversal to the downside indicates that a 2 to 3 day break is likely. The next downside target is 1.0273 to 1.0235. A change in investor sentiment should put pressure on the Dollar/CAD. Traders should watch crude oil and equity prices for direction. Greater demand for risk means greater demand for the Canadian Dollar.
Falling demand for the higher yielding AUD USD and NZD USD helped to push both of these currency pairs lower. The weak U.S. equity markets early in the trading session exerted the most pressure on the Aussie and Kiwi. Downside momentum could drive the Australian Dollar to .8577 over the short-run. The New Zealand Dollar took out a series of old bottoms and now appears to have its sight set on a test of the February bottom at .6806.
It’s a long shot but both of these markets could retrace 50% of their recent breaks. This would make .9036 the upside target in the Aussie and .7120 the target for the Kiwi. The catalyst behind such a move will be a strong retracement in U.S. equity markets.
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