The U.S. Dollar declined against all the major currencies on Tuesday after economic reports showed U.S. retail sales and business inventories rose more than analyst expectations.
The friendly data helped ease investor concerns about the outlook for the global economy, making them more willing to buy riskier assets. Increased appetite for risk drove up demand for stocks and commodities while encouraging the liquidation of assets considered safer, such as the U.S. Dollar.
Traders bought the Euro after the friendly report was released. The EUR USD rallied sharply higher for the second day in a row following a slight setback overnight. Now that the daily chart has reaffirmed its uptrend, momentum is likely to carry this pair into a Fibonacci/Gann angle price cluster at 1.3049.
Early in the session the Euro was trading lower, giving back some of yesterday’s gains after it was reported that the ZEW indicator of German economic sentiment fell sharply in September to -4.3 from 14 in August. Pre-report economist guesses were for a drop in the index to 9.0.
Despite the overnight weakness, the main uptrend never appeared to be threatened. Traders were basically using the report to pare positions ahead of today’s U.S. retail sales number after yesterday’s sharp move to the upside. Although the report showed economic sentiment had dropped more than expected, the odds remain low that Europe will experience a double-dip recession. The strong rise in the Euro at the Dollar’s expense suggests that investors believe that the European economy will recover faster than the U.S. economy.
Pressure continued to mount on the USD JPY even after current Prime Minister Kan was retained by voters after today’s election. The decision to continue to support the Japanese Yen is a sign that investors are not confident the government or the Bank of Japan’s intent to intervene is not being taken seriously. Furthermore, investors also feel that an intervention may not be successful now because it requires the cooperation of other central banks which may not be very helpful at this time due to their dealing with economic issues of their own.
Technically, at a minimum, this market is going to have to produce a daily closing price reversal bottom to get the ball rolling to the upside. The best sign of a bottom, however, will be the formation of a weekly reversal, but we won’t know it has formed until later in the week.
The GBP USD finally broke through the downtrending Gann angle which had held this market down since the 1.5997 top formed on August 6. This angle came in on Tuesday at 1.5457. The sharp acceleration to the upside took out stops and attracted fresh buying. The current chart formation and upside momentum indicates that this market is likely to rally over the short-run into a retracement zone at 1.5647 to 1.5729.
Continue to look for the Dollar to weaken as long as there is demand for higher risk assets. In addition, traders must monitor U.S. economic reports. At this time it seems, investors are selling the Dollar on good U.S. economic news but at some point in the future this way of thinking is going to shift. Based on the rally in the T-Bond market, it looks as if investors still expect lower yields, which translates into a weaker outlook for the economy. The Dollar is likely to continue to weaken against the Euro as long as investors believe that the Euro Zone economy is on a faster path to recovery than the U.S. economy.
Watch the stock market and the Euro as to whether this demand is waning. The problem with the markets lately has been the lack of follow-through and the tendency to take small, quick profits. Coupled with high volatility, this could lead to wild swings.
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