After piercing a minor .618 retracement level Tuesday morning, selling pressure hit the Euro after U.S. Consumer Confidence fell more than analysts had estimated. The report pressured equities and drove down demand for higher risk assets.
Today’s action is significant because it shows that investors have set aside worries about the European bank stress tests and are now turning their focus toward economic reports. Traders seemed reluctant to go long this morning after the U.S. reported a slight gain in home prices and amid improved corporate earnings. This represented a shift in sentiment as earlier in the month investors chased the Euro on both good and bad news for the Dollar.
The housing report in particular was interesting because it gave hope that the housing market may be improving although at a slow pace. Although reports have been confusing to investors lately, today’s break looks as if buyers just gave up on the long side of the Euro or they are making up excuses to take profits. Today’s break also demonstrates the strong correlation between the Euro and U.S. equity markets at this time.
Technically the Euro is in a position to form a daily closing price reversal top. This could lead to the start of a 2 to 3 week break if confirmed.
The break in the U.S. equity markets is also leading to profit-taking in the higher risk currencies. All three major asset-linked currencies – Australian Dollar, New Zealand Dollar and Canadian Dollar – are in positions to post closing price reversal tops. If sentiment is turning bearish on risk then look for the start of a correction in these three markets.
The markets could move overnight since Australia is due to issue its monthly Consumer Price information. A strong number will mean that the Reserve Bank of Australia will likely raise rates at its August 3 meeting. This could ignite a rally in the Aussie and spread to other commodity-linked currencies. A lower number means the likelihood of a rate hike will be diminished. This could have a bearish influence on stocks and risky commodities.
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