The stronger Dollar triggered a sharp sell-off in February Gold overnight.  Despite the hard break, this market is still holding a key 50% level at $1107.40.  A break of this level will fuel a further decline to the November main bottom at $1102.60.  Ultimately, this market should test uptrending Gann angle support at $1094.00.  Watch for a technical bounce when this angle is tested.  

Despite the stronger Dollar and weak equity prices, March Crude Oil is holding yesterday’s low at 72.45.  At this time, the market is hugging a .618 price level at 73.63.  Regaining this price will likely trigger a retracement to 75.53.  Yesterday, OPEC did nothing to change the bearish supply/demand picture.  Today’s industrial production report could help underpin this market today.

Equity markets are trading flat to lower across the board.  Investors have digested the Dubai news and are now waiting for another catalyst to drive these indices higher.  Many traders are choosing to remain flat ahead of tomorrow’s important Fed decision.  Traders are reluctant to chase this market higher which means there may be a correction today to set up the next buying opportunity.  If stocks couldn’t sustain the upside momentum yesterday after receiving good news, it is highly unlikely that today will be a bullish day,

March Treasury Bonds and Treasury Notes are trading under pressure overnight.  Investors continue to drive yields higher in anticipation of a rate hike by the Fed by June 2010.  Traders are nervous that the Fed may put out a more hawkish comment tomorrow which may move up the date of the first rate hike in years.  

The U.S. Dollar Index erased all of yesterday’s loss overnight and turned the main trend to up when it crossed a previous main top at 76.82.  Traders are increasing bets this morning that the Fed will raise its key interest rate by at least a quarter-percentage point from near zero by June.

Traders are basing their projections on the recent series of good economic reports, namely the unemployment rate and retail sales.  Expectations are for the Fed to revise the language in its statement to represent a more hawkish outlook while revealing signs of an earlier exit from low rates than previously estimated.  Aggressive traders are already giving the Dollar a boost based on this projection.

The key to sustaining the rally in the Dollar will be Fed Chairman Bernanke.  The question investors are asking is “will he validate an early exit scenario?”  Lately he has been downplaying the need for higher interest rates because of his concerns about the sustainability of the economic recovery.  He doesn’t want to raise rates too early or too late.

Traders will be watching the Fed’s statement tomorrow for a hint of a rate hike.  Market participants will be disappointed if the Fed maintains its current dovish stance.  In its November statement, Fed officials pledged to keep rates near zero for “an extended period”.  They also specified that the current loose monetary policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.  Since this statement, the unemployment rate has declined from 10.2% to 10.0%.  The drop in the unemployment rate should be enough for the Fed to lighten up the tone in its December statement.  

Today’s producer prices report is expected to show an advance.  This news should be supportive for the Greenback as it would force Dollar traders to readjust short positions and fuel more speculation that the Fed is getting ready to begin a tight monetary policy campaign. Other reports which may trigger the same response from traders include industrial production and the NAHB Housing Report.  

The March Euro took a hard hit overnight following the release of the German ZEW Economic Expectation Index report.  The Euro fell to a two-month low versus the Dollar when the ZEW report showed a decline from 51.1 in November to 50.4.  Going into this report, Euro investors were cautious about the economy because of credit downgrade concerns in Greece, Spain and Portugal.  Adding further to the weakness is a report that Austria nationalized a bank last night and may be facing a banking crisis.  

Technically, the Euro is headed toward a major uptrending Gann angle from the March low at 1.2456.  This angle comes in at 1.4496 today.  In addition, a minor .618 retracement level is at 1.4465.  Breaking under these two levels will be bearish for the long-run, but oversold short-term indicators could trigger a technical bounce or short-covering rally.

Despite the weaker Euro and signs the Fed is getting ready to hike interest rates, the GBP USD remains inside of a retracement zone at 1.6292 to 1.6154.  Overnight news that November CPI increased to 1.9% was largely ignored by traders since the pre-report guess was for an increase of 1.8%.  This currency is not likely to move until it breaks out of its short-term trading range.

The increased outlook for a rate hike by the Fed is helping to boost the Dollar versus the Yen. Traders are becoming more confident that the Fed will hike rates sooner than expected while the Bank of Japan is expected to keep interest rates unchanged at 0.10% on December 17th.  The increase in the spread between the two interest rates is triggering a reversal in the carry-trade. Investors are buying Dollars to payback loans while simultaneously borrowing Yen.

Yesterday’s news that Abu Dhabi bailed out Dubai made traders rethink their position about using the Yen as a safe refuge.  Technically, the March Japanese Yen rejected a test of a 50% level at 1.1318.  The current formation rally indicates that 1.1207 is the next downside target.  Taking out this level signals a further decline to 1.1066.  

Weaker Gold and the stronger Dollar are helping to trigger an overnight break in the March Swiss Franc.  This market is now at its lowest level since October.   Look for the old bottom at .9690 to become new resistance.

Weaker gold and crude oil should put pressure on the Canadian economy which is likely to lead to a further decline in the March Canadian Dollar.  This currency currently remains rangebound with .9365 the downside objective and .9571 the upside resistance.

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