The U.S. Dollar is trading lower overnight following a strong two-day rally.  Yesterday the Dollar rallied sharply higher versus all major currencies with the exception of the Japanese Yen as investors became risk averse for risky assets following a hard sell-off in the Chinese stock market.

Today is expected to be a different story as the Dollar is reacting to the news that an increase in German investor confidence was greater than experts had forecast.  Overnight it was reported that the ZEW Center for European Economic Research Index of investor and analyst expectations rose to 56.1 in August from 39.5 in July.  

This news came as a surprise to equity and currency traders triggering short-covering rallies in the September Euro and European stock markets.  Yesterday these markets broke as traders dumped higher risk assets on the thought that their recent rallies were way ahead of the economy.  This morning’s report is renewing optimism in the possibility of a strong Euro Zone recovery during the latter part of the year.

Coupled with last week’s news of unexpected growth during the second quarter in France and Germany, today’s news has the potential to help put in a bottom and trigger the start of another rally.  Because of the size and duration of the current break however, it looks like this market will have to develop a more solid support base in order to support a rally.  A spike to the upside will most likely indicate short-covering, but a more constructive support base will be a strong sign that the buying is greater than the selling at current levels.

On the weekly chart, the main range in the September Euro is 1.3736 to 1.4449.  This range creates a retracement zone at 1.4092 to 1.4008.  Overnight the Euro stopped inside of this range and has since regained 1.4092.  Based on the developing formation and the friendly fundamentals, watch for a rally back to 1.4259.

Similar retracement patterns are developing in the September British Pound and September Canadian.  Both of these markets are likely to piggy-back the move in the Euro as they have no fresh news to move on.  The September Japanese Yen is expected to open lower as demand for higher risk assets returned overnight.  

Equity markets are called better on the news out of Germany and on expectations of a better than expected U.S. Housing Starts Report.  Yesterday the trend turned down in all three major indices so today’s rally should be treated as short-covering.  Volatility could get huge this week because of thin trading conditions and this Friday’s option expiration.  The markets could witness volatile two-sided trading before settling on a direction later in the week.

Look for December Gold and December Silver to rebound after a two-day break because of the weaker Dollar.  December Copper is also expected to post a gain on renewed speculation of an economic recovery.


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