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The U.S. Dollar held on to most of its gains as traders await Friday’s U.S. employment report. On Thursday, the Weekly U.S. Initial Claims report showed that fewer workers filed for unemployment benefits last week.  This news helped boost an already strong Dollar. The ability to hold on to its gains into the close may be an indication that investors are anticipating a friendly U.S. Non-Farm Payrolls Report tomorrow. Volume has dropped off noticeably which is a strong indication that the ranges for the day have been made.

The U.S. Dollar erased early overnight losses to move higher after China shocked the Forex markets with a surprise hike in interest rates. China’s move to curb excessive lending and curtail price increases drove traders into lower yielding, safe haven currencies.  China’s central bank sold 3-month bills at a higher interest rate for the first time in 19 weeks.

The EUR USD traded lower throughout today’s session as demand for higher risk assets dropped following the rate hike in China.  At the close, the Euro was hovering near a retracement zone at 1.4350 to 1.4319.

The top-heavy GBP USD continued to erode support overnight. Further downside pressure was triggered after the Bank of England announced that interest rates would remain at 0.50% while leaving its asset purchase program in check.  Overnight selling pressure took out weak longs who were trying to establish support at a retracement zone at 1.6036 to 1.5988. If selling pressure continues tomorrow, the most obvious downside objective is the recent bottom at 1.5832.

Trumping the BoE meeting was the on-going heated debate over the budget deficit.  Prime Minister Gordon Brown and Conservative opposition leader David Cameron are currently engaged in a heated discussion on how to handle the growing budget difficulties.

Bearish comments from the new Japanese Finance Minister helped trigger a surge to the upside in the USD JPY overnight.  In addition, the friendly Weekly U.S. Initial Claims number drove this pair to a four-month high.  Overnight Naoto Kan said he wanted to see a weaker Yen.  This announcement is leading traders to believe that Japan may be more inclined to stem any sharp rise in its currency.  Kan feels that his job will be to keep the Yen at an “appropriate level.”  This is necessary to sustain demand for Japanese exports.

Technically, the USD JPY should remain strong as long as the uptrending Gann angle at 91.93 holds tomorrow.  Based on the main range of 101.44 to 84.83, traders should look for a retracement to 93.13 to 95.09 over the near term.

The stronger Dollar is helped pressure the Swiss Franc. Today’s closing price reversal bottom suggests that a new higher bottom has been formed at 1.0241  Based on the short-term range of 1.0507 to 1.0242, traders should look for a minimum retracement to 1.0374 – 1.0406.  Taking out this zone should trigger acceleration to the upside.

The USD CAD maintained strength after a slightly better opening.  Today’s closing price reversal indicates that a short-term bottom has been reached which could trigger a minimum 2 to 3 day rally. The current chart formation indicates a possible rally to 1.0517 – 1.0571 over the near-term. Weaker gold and crude oil prices will continue to underpin the market.  

The AUD USD finished lower after an early rally. Last night, the Aussie surged to the upside after a strong retail sales report heated up speculation that the Reserve Bank of Australia would hike interest rates once again at its next meeting on February 2nd.  

The news of China’s rate hike triggered a profit-taking sell-off as traders read this action as a sign that demand would slow for Australian raw materials. A drop in demand for commodities would hurt exports and the economy.  Technically, the Aussie Dollar posted a daily closing price reversal top which could start a 2 – 3 day break back to .8999 to .8937.
 
The NZD USD rose in conjunction with the good news from Australia, but weakened after China hiked interest rates.  Like the Australian economy, the New Zealand economy relies heavily on exports to China.  The move by the Chinese government signals that demand for New Zealand goods may be curtailed. Technically, Thursday’s closing price reversal top should trigger a 2 to 3 day break to .7198 to .7145.

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