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Tuesday, 20 Jul 2010
Dollar and Euro Strengthen Despite Negative News
In a light trading day, the dollar was higher against most of the majors, with the lone exception being the euro. Risk aversion was lower as traders shrugged off the downgrade of Ireland's credit rating as U.S. equities finished higher despite negative housing data from the U.S. economy.
USD - Greenback Rises with Equities
The Dollar strengthened yesterday following a decrease in risk aversion. A firmer greenback came despite a weaker than expected NAHB Housing Market Index. The index which measures the outlook on home sales fell to 14 despite market expectations of a second consecutive output of 16.
The GBP/USD finished lower at 1.5220, following an opening price of 1.5306. The USD/CHF was up to 1.5045 after opening the day at 1.4071. The USD/JPY was relatively unchanged at 86.70.
U.S. Equity markets finished marginally higher despite a wave of negative fundamental news from Europe. The Dow Jones Industrial Average ended the day up 0.5%. Ireland's sovereign credit rating was cut by Moody's rating service as well as Hungary's rejection of further austerity measures.
Today's trading should see higher volumes with a glut of news on the economic calendar. Driving the dollar will be the release of U.S. building permits which are expected to come in at 0.57M. Strong numbers could help the dollar to continue to strengthen against the majors. The next support for the GBP/USD rests at the level of 1.5200, yesterday's low for the pair. Additionally, the Canadian Overnight Rate report could heavily influence the USD/CAD when it is released at 13:00 GMT.
EUR - Moody's Downgrades Ireland's Sovereign Debt
The EUR continues to strengthen versus the dollar, despite a wave of negative fundamental news from the euro zone and the periphery. Yesterday, Moody's Investor Service downgraded the sovereign debt rating of Ireland, noting a high debt burden, a struggling banking sector, and slowing economic growth. Also weighing over yesterday's trading was a breakdown in negotiations between the IMF and Hungary. Negotiators for the IMF walked away following Hungary's refusal to accept strict austerity measures.
Despite the negative fundamental news from Europe, the EUR traded higher versus the dollar, finishing the day up at 1.2935, from an opening day price of 1.2902. The EUR/GBP was also higher, trading near the 0.8500 mark after opening at 0.8428.
Tomorrow will bring the release of German inflationary data in the form of the monthly PPI numbers. The release is forecasted to come in at 0.2%. An output on par with market expectations may bring a muted impact. But a number below the forecasted value could hurt the euro as global deflationary fears are beginning to surface. As such, traders should look to other data for direction in euro pairs. Further bullishness may be seen in the EUR/USD as the pair approaches the resistance level of 1.31.
JPY - Potential Intervention by the Bank of Japan?
The Japanese yen continues to strengthen. Persistent worries about strengthening versus the dollar, euro, and pound may bring about a round of intervention by the Bank of Japan (BOJ). Possible steps that would be considered by the BOJ would be purchases of government securities. Intervention could be likely, should the USD/JPY rate fall below the 85 level. A strong yen hurts Japan's export dependant economy by making exporters' goods more expensive and less competitive in the global marketplace.
Yesterday the USD/JPY traded relatively unchanged at 86.70.
The USD/JPY has been trending lower for the past 3-months but is showing some technical signs for a short term reversal. Friday's trading ended with a spinning top candlestick pattern and a bullish cross is forming on the daily chart's slow stochastic oscillator. Traders may want to cover any short positions they may have as a pullback may occur to the next resistance level at 88.
Crude Oil - Spot Crude Oil Flirts with 200-Day Moving Average
Crude Oil prices rebounded yesterday following 2 consecutive days of losses for the commodity. Driving the price higher were reduced risk aversion and gains in equity markets.
Spot Crude Oil prices finished the day at $77, following an opening day price of $76.14. The price reached a high of $78.13 before weaker than expected U.S. housing data influenced traders to reduce their exposure to riskier assets.
Range trading of the commodity has been predominant between the prices of $70-$80. The price of spot Crude Oil has flirted with the resistance level of $78 since last week, unable to breach this mark. This level also coincides with the 200-day moving average line. A breach above this level could propel spot Crude Oil to the next resistance level near $80.
The Slow Stochastic on the daily chart shows a bullish cross has formed, indicating that the pair may be in overbought territory. Typically, this is a sign that a downward correction is imminent. This theory is supported by the Relative Strength Index on the 8-hour chart. Traders may want to go short with tight stops today.
While the Slow Stochastic on the 8-hour chart shows a bearish cross has formed, typically a sign of impending upward movement, most other indicators show this pair trading in neutral territory. Traders may want to take a wait and see approach today, as a clearer picture may present itself in afternoon trading.
The Relative Strength Index on the 8-hour chart indicates that the pair is currently in oversold territory. This theory is supported by the Slow Stochastic on the daily chart which shows a bearish cross has formed. Going long may be the preferred option today, as an upward correction could occur.
While the Relative Strength Index on the 4-hour chart shows the pair approaching overbought territory, most other indicators are looking inconclusive. Traders are advised to wait for a clearer picture to present itself before entering into any positions today.
The Wild Card
Several technical indicators are showing that this pair is due for a downward correction in the near future. The Relative Strength Index on the 8-hour chart shows the pair in overbought territory. The Stochastic Slow on the daily chart shows a bullish cross has formed. For forex traders going short with tight stops today may be the preferred strategy for this pair.