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Tuesday, 19 Jul 2011
ZEW Confidence a Signal of What Comes Next?
News of debt contagion spreading across the euro zone has several economists worried that a toppling of consumer confidence may be up next, followed by additional ratings downgrades that lead into an ever deepening spiral of debt and default. With today's ZEW reports on economic sentiment expected at 10:00 GMT, forex traders may catch a glimpse into the early evolution of the investment landscape as it turns towards another crisis.
USD - USD Rising as Safe-Havens Soar
The US dollar (USD) was seen increasing yesterday as traders began to seek shelter following speculation that growth forecasts across Europe will become further depressed as traders flee risk. The value of safe-haven assets like the greenback and Swiss franc (CHF) have been buoyed by a shift away from higher yielding assets.
The news so far has inched traders into a position of market pessimism which has helped to lift the value of the USD as riskier currencies like the EUR take a dive. With the economies of Europe largely absent from yesterday's calendar, little news emerged which put a dent in the amount of pessimism surrounding the forex market, particularly in the fragile euro zone.
With a heavy news day expected today, however, traders are sure to see a return of portfolio adjustment as volatility becomes elevated. The US economy will be publishing two reports on housing at 13:30 GMT. Should today's news disappoint, there is a possibility that more investment will get pushed towards the safety of the greenback, driving USD values higher. Traders will also want to keep an eye on euro zone economic news as it may also impact risk sentiment heavily during the morning sessions.
EUR - Euro Zone Consumer Confidence under Review Today
The euro (EUR) has been seen trading lower this week as traders assess the risk sentiment across the region. Against the US dollar (USD) the euro was seen trading bearish in late trading as shifts into safe-haven investments pulled money out of the 17-nation currency and into other stores of value.
News of debt contagion spreading across the euro zone has several economists worried that a toppling of consumer confidence may be up next, followed by additional ratings downgrades that lead into an ever deepening spiral of debt and default. Rising inflation poses a threat in this scenario and the euro zone faces the debacle of lifting interest rates to quell inflation, but gouge their ability to pay off debt; or hold rates steady to allow for more growth while inflation takes off.
On tap today, traders will witness the release of two significant reports on consumer confidence. At 10:00 GMT, the organization known as ZEW will be publishing its economic sentiment reports for Germany and the broader euro zone. Should the figures reveal stagnation in consumer and business optimism, we could see heftier flights to safety in the days and weeks ahead. This would likely push the value of the EUR lower over the long-haul as traders continue to flee risk in larger numbers.
AUD - Defensive Trading Leads to Weaker AUD
The Australian dollar (AUD) was trading weaker versus most of its currency counterparts yesterday after data releases have begun to shift traders back into safety. The Aussie has been losing momentum these past few weeks as risk aversion becomes predominant in the global market. Fears of a debt contagion spreading from Greece to Italy now factor greatly into global risk assessment, as does the monetary policy of China in regards to the Pacific economies.
This movement has gouged the AUD against all of its currency rivals, especially against safe-havens like the US dollar (USD) and Japanese yen (JPY). With Australia's central bank releasing the minutes from its latest monetary policy meeting, there is a chance that speculators will pick up on several cues to adjust their positions in regard to the Aussie. Being linked with commodity prices could also help lift the AUD in the near future, but general risk aversion is likely to push the currency lower as traders flee risk.
Oil - Oil Prices Drop as Investors Weigh Global Growth Potential
Crude Oil prices dropped moderately towards $95.10 a barrel Monday as sentiment appeared to favor a downturn in global industry alongside a slump in demand. Data releases out of Europe and the US last week are still driving many investors back into safe-haven assets as many reports suggested a surprise downtick in growth among global industrial output and consumer spending.
As investors sought safety, the value of crude oil, which has been seen rising since the middle of last week, fell to a weekly low of $95.10 a barrel. A sudden jump in dollar values due to this week's risk averse environment has helped many investors ram up their short-taking positions on physical assets. Should Crude Oil sentiment hold steady this week, oil prices may continue to meet resistance.
After a gapping lower to start last week the pair moved below the 200-day moving average and on the subsequent rebound the EUR/USD found resistance at its 100-day moving average, a previous level the pair struggled to close below between the months of April and July. While the rebound higher was sharp the failure of the pair to move above the 100-day moving average and to close above the opening gap signals weakness in the pair. Initial support is found at last week's low at 1.3870 followed by the rising trend line from the June 2010 low which comes in at 1.3750. A break here is significant as it would compromise the long term uptrend for the euro, exposing the 50% retracement level at 1.3410. To the upside last week's high at 1.4290 is the first resistance followed by the falling resistance line from the May and July highs at 1.4490.
The GBP/USD price collapsed only to find support at the 38% retracement level of the May to April move at 1.5780 while the rebound higher was capped at the neckline from the head and shoulders reversal pattern. Positive divergence is found on the RSI-14 as the price made a new low but the RSI did not. This signals a potential warning sign for sterling bears. Resistance is located at 1.6230 off of the falling trend line from the April high. Above this level the previously broken trend line from the May to April move at 1.6330 will come into play. To the downside a break of 1.5780 would signal a resumption of the downtrend and would target 1.5650 which has served as both support and resistance in October and in December of last year.
The USD/JPY downtrend resumed with a vengeance last week as the pair broke below the 80 yen “line in the sand” and the support from May 5th at 79.55. This level has now turned into resistance as often happens to previously broken support levels. Only last week's low at 78.46 and the bottom of the long term wedge from Sept 2004 at 77.60 stands in the way of the all-time low at 76.11.
The Swissie has moved in one direction and one direction only. The pair made a halfhearted attempt close above its 50-day moving average and moved sharply lower from there setting a new all-time low at 0.8082 which serves as the initial support level. Any move higher may find resistance at 0.8275, the falling trend line from the February high which comes in at 0.8450, and 0.8550.
The Wild Card
A potential head and shoulders reversal pattern has formed on the daily chart of the S&P 500 after the index failed to move above the early May high. The neckline of the pattern runs underneath the March and June lows and comes in at 1,260. A break below the neckline would confirm the reversal pattern. Another key level to watch is the 200-day moving average at 1,280. Forex traders should note that a measured move from the chart pattern shows a potential decline of 120 points.