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Monday, 25 Jul 2011
US Debt Limit Talks Break Down, Currencies Mixed
A breakdown in Congress over the debt limit this weekend has resulted in rather sporadic behavior in the forex market so far Monday morning. Though risk aversion appears to be rising, indicated by soaring precious metal values, the EUR also appears to be on the rise as the US dollar (USD) plummets. A sentiment of weakening US value appears to be seeping in as the August 2 deadline nears.
USD - USD Bearish as Debt Talks Fumble
The US dollar (USD) was seen trading bearish at the start of this week as traders began to view the lackluster performance of the US economy these past several weeks as a sign that regional economic growth will be limited. The dollar has been primarily gaining from such momentum due to the shift into safer assets, but woes regarding the inability of Congress to address the impending debt crisis have begun to drag on the USD.
Though news has been both positive and negative, traders have been predisposed to short the higher yielding assets in general as the US and European economies falter. As the August 2 deadline rapidly approaches, we are beginning to see some hedging behavior with the Swiss franc (CHF) and Japanese yen (JPY) acting as alternate stores of value should the US default on its loans. The USD/JPY in particular has fallen below intervention levels and now trades near 78.00.
As for today, the US economy will be absent from the economic calendar and most of the other major economies will be presenting only meager reports. Risk appetite and market volatility are likely to be at a minimum today as investors gear up for the rollercoaster that lies ahead considering this week is the last before the deadline for a lifting of the US debt ceiling.
EUR - EUR Swings Upward Strongly, Gains Appear Shaky
The euro (EUR) was seen trading higher this morning following news of pessimistic growth in both the US and European economies. Against the US dollar (USD) the euro was trading somewhat bullish in late trading Friday as shifts away from safe-haven investments pulled money towards the euro and away from stores of value. The EUR/CHF, however, experienced a downturn on Friday, plunging to 1.1715 after a week of gains.
Traders are looking for a way to balance a renewal of risk appetite with continued shakiness in global markets. A show of concern towards investing in the US dollar at the moment due to the debt limit talks taking place in Congress has unsettled many investors who were looking for gains at the start of this week. A failure to lift the debt ceiling could result in a default by the US government, causing ratings agencies to downgrade US debt and pull the global economy in several directions, likely bearish across the board.
Sentiment across the euro zone has also turned negative, with many analysts and economists expecting moves towards safety by traders this week. Any more bearishly-leaning news out of any major global economy will likely pull down on the EUR even further as investors flee risk, despite a moderate sentiment of bullishness taking hold this morning.
AUD - AUD Sees Downtick after Bullish PPI Data
The Australian dollar (AUD) was seen trading moderately lower versus most other currencies this morning after inflationary data this morning caused a stir in Pacific markets. The Aussie has been experiencing several wide swings lately from the various shifts into and away from riskier assets. Traders witnessed a turn towards safety after last Friday's economic reports, but sentiment appears mixed as of this morning.
The latest moves have helped to lift the AUD as traders turned to its high interest rates in order to seek profits in higher yielding assets like the AUD, NZD and Scandinavian currencies. The producer price index (PPI) published this morning beat forecasts, but so far has pushed down on the Aussie as traders had priced in positive growth ahead of time. The profit-taking could explain part of this recent downtick, but it doesn't appear that it will last through the day.
Gold - Gold Price Spikes on Increased Risk Aversion
The price of Gold found solid support this past week despite the rising strength of the US dollar, the currency in which such assets are valued. Precious metals bear their name as a result of their traditional store of value in times of uncertainty. Gold has been trading with rather mild price action since June, but traders have been awaiting price resurgence due to the rampant increase in risk aversion due to rising tensions from Greece and faltering debt talks out of the US.
As investors seek safety, the value of gold, which has been seen trading with mixed results, jumped to an all-time high of $1623.95 per troy ounce. A sudden jump in dollar values due to this week's risk averse environment has so far done little to suppress this price movement as gold serves as a traditional store of value. Should risk sentiment hold steady this week, the prices for this precious metal may continue to find support as the week moves ahead.
The EUR/USD has taken a step away from the edge after failing to get a close below its 200-day moving average and the price is testing the falling trend line from the May and July highs at 1.4450. Short term momentum is currently rising and break above this resistance line may find resistance at the peaks from July, June, and May at 1.4580, 1.4700, and 1.4940 respectively. However, a bearish tweezer candlestick pattern has formed on the daily chart from last week's highs on Thursday and Friday, strengthening the argument for the 3-month old resistance line to hold. Support is found at 1.4015, 1.3835, and 1.3780 from the rising trend line off of the June 2010 low.
After dipping as low as 1.5780 which is the 38% Fibonacci retracement level from the May 2010 to April 2011 move, Cable has broken above both the neckline from the head and shoulders pattern and the resistance line falling from the April and May highs. The pair has now found resistance at the previously broken trend line from the May 2010 low and now serves as initial resistance at 1.6360. A move above this line will likely go on to test the May high at 1.6545 though sterling bears may make a stand before the April high of 1.6745. To the downside support may come in where the neckline and the previous resistance line off the April and May highs intercept at 1.6190. Additional support is located at 1.6000 and the July low at 1.5780.
The reemergence of yen strength has taken the USD/JPY one step closer to its all-time low at 76.11. Falling stochastics on the monthly, weekly, and daily charts all point to additional declines in the pair. Initial support is found at 78.20 followed by the lower line from the falling wedge pattern from December 2008 which comes in at 77.50. A move higher may find resistance at 79.60 and 81.50.
An attempt to push the USD/CHF higher ran into resistance at 0.8270. Since failing to hold any gains the pair looks to test the most recent all-time low at 0.8080. Any attempt to move the pair higher will likely encounter resistance at 0.8270 and 0.8385 from the falling trend line off the February high. Relative value sellers of the pair may also be lurking at 0.8550.
The Wild Card
After bouncing higher at the 200-day moving average the S&P 500 is testing the right shoulder of a potential head and shoulders chart pattern at 1,353. A move above this level would nullify the reversal pattern and the index could go on to test this year's high at 1,372. Forex traders should note support for the S&P 500 comes in at the 200-day moving average at 1,300, this month's low at 1,291, and the neckline of the head and shoulders pattern at 1,260.