A surprise decline in crude oil inventories led to a reversal to the downside in the U.S. Dollar on Wednesday.  Crude oil rallied sharply higher triggering rallies in the equity and currency markets on the notion that trader demand for higher risk assets would increase.  

Higher equity and energy prices helped the EUR USD gain ground throughout the day in a combination of short-covering and fresh buying.  Many Euro traders had been leaning to the short-side prior to the crude oil news due to a sell-off in the Chinese stock market overnight.  This weakness helped create a risk adverse environment and traders were selling in anticipation of less demand for higher risk assets. The bullish news regarding crude oil inventories caught early sellers by surprise forcing them to cover their newly initiated short positions.  The main trend is down on the daily chart.  Without a follow-through rally overnight or tomorrow expect the trend to continue down.

Stronger equity and energy markets helped weaken the USD CAD.  The U.S. Dollar was trading better against the Canadian early in the trading session, but the bullish crude oil news forced weaker USD CAD longs out of the market.  The next two days will determine if the trend is turning back down or if today’s action was an aberration.

Stronger demand for equities helped boost the higher yielding AUD USD and NZD USD.  The rally in these two markets appears to be short-covering in reaction to a hard rally in the crude market due to 0bullish inventory news.  Today’s action may have been the test of last week’s highs in these two markets.  

The GBP USD erased much of this morning’s early losses when equity and crude oil markets took off to the upside.  Overnight the pressure was on the British Pound following the release of the minutes from the Bank of England policy meeting on August 6th.  This news created a bearish stir because it showed that BoE Governor Mervyn King was looking for a greater increase in quantitative easing than was eventually agreed upon.

The giveback in the Forex markets late in the trading session may be an indication that today’s action was just an aberration as nothing was done to actually change the trend.  The action over the next two days will dictate whether the Dollar will continue to gain strength or start on another leg lower.  


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