British Pound Firming; Investors Betting on Conservative Party Victory
The GBP USD trading better overnight as investors increased
bets on a victory for the Conservative Party. No matter how the election pans
out, traders are counting on the new government to mount a steady attack on the
countryâ€™s huge budget deficit. This may mean the implementation of new taxes
and austere cost slashing. U.K.
voters realize that either a Conservative Party or Labour Party victory will
mean aggressive action will have to be taken in order to avoid the same fate as
the Euro Zone economies. Last week, both the S&P and Moodyâ€™s credit rating
agencies said that a debt rating cut is likely depending on how the new
government chooses to attack the countryâ€™s fiscal problems.
Technically, the British Pound is trading inside of a
retracement zone at 1.5163 to 1.5078. Additional support is being provided by
an uptrending Gann angle at 1.5087. The main trend is down, but this market
appears ripe for a short-covering rally. A move above 1.5163 will indicate
strength. Look for a possible acceleration to the downside if 1.5078 fails to
hold as support.
The Dollar Index continued to rally overnight, touching its
highest level since May 2009. After spending April trading on both sides of a
monthly 50% level, the Index is now in a position to test the .618 price. Based
on the major monthly range of 89.62 to 74.17, traders should look for the
market to test 83.72 over the near-term. This market should continue to remain
strong as long at 81.90 holds as support.
Weaker gold, crude and equities are helping to trigger a further
rally in the USD CAD. After building a support base in April, this pair finally
crossed a swing top at 1.0215 to turn the main trend to up on the daily chart.
Upside momentum indicates that the March 26th top at 1.0302 is the next upside
objective followed by a 50% level at 1.0366.
The weakening Canadian Dollar is most likely pleasing to the
Bank of Canada which hinted last week that a strong currency is likely to have
an impact on inflation and monetary policy. This led this analyst to believe
that the BoC was intervening to weaken the Loonie. Look for the USD CAD to
continue to strengthen unless there is renewed demand for higher risk assets.
The AUD USD is under pressure overnight due to renewed
weakness in the U.S.
equity markets. Early Tuesday night the Reserve Bank of Australia hiked its benchmark
interest rate as expected by 25 basis points to 4.50%.
Based on comments from RBA Governor Glenn Stevens, this is
likely to be the last rate hike for a while. Stevens feels that the RBA has
reached its objective by bringing rates back to normal between 4.50% and 5.00%.
He further added that he feels inflation was likely to remain in the upper half
of the RBAâ€™s target range.
Besides the weakness in the equity markets overnights and
the falling demand for higher risk commodities, traders also remain a little
cautious as to whether a tighter monetary policy in China will curtail demand
for Aussie goods and services. Based on the main weekly range of .8577 to
.9387, traders should look for the Aussie to correct to .8982 to .8886.
The NZD USD is falling in sympathy with the Australian
Dollar and a lack of demand for higher yielding assets. Based on this weekâ€™s
policy statement by the RBA, many traders now feel the Reserve Bank of New Zealand
will wait until the second half of the year before raising rates.
The chart formation suggests that .7199 is a key pivot
number. Falling below this level suggests a test of the point .618 level at
.7163. The main trend is up and does not turn down unless the swing bottom at
.7052 is taken out. The first clue that a change in trend is imminent will be
the breaking of a long-term uptrending Gann angle at .7121.
The Euro continued to trade lower overnight, reaching its
lowest level since February 2009. Although a bailout agreement was reached by
the Greek government, the European Central Bank and the International Monetary
Fund over the week-end, bearish traders have shifted their focus to the growing
fiscal problems in Spain and
Hedge fund and large traders continue to press the
short-side. Short-term conditions are oversold, but there is no indication of a
let up in the selling pressure. This type of formation typically ends with a
closing price reversal bottom. Traders should start watching the 60-minute
chart for clues as to whether bearish conditions are getting ready to shift.
Tomorrow the European Central Bank will hold a meeting.
Traders expect interest rates to remain unchanged. The policy statement is
expected to address that fact that rates will remain low for an extended period
of time as the Euro Zone will need time to sort out its financial mess. ECB
President Trichet is also expected to address the problems in Greece, Portugal
In his after meeting speech, he is most likely going to try to boost the
confidence in Euro investors.
The weak Euro is sending the USD CHF sharply higher. Traders
continue to expect the Swiss National Bank to intervene to defend its currency.
Based the 12-month range of 1.1965 to .9918, the market is now trading inside
the retracement zone of this range at 1.0914 to 1.1183. Look for this pair to
continue to strengthen as long as the low end of the range holds with the upper
end the next objective. The severely oversold Euro may trigger a short-covering
rally in the Swiss Franc. Aggressive traders have to be careful about chasing
this market higher.
The lack of follow-through to the downside in the U.S. equities
markets is helping to underpin the USD JPY. A turnaround in demand for higher
yielding assets is likely to trigger a positive response in the Dollar/Yen with
a move through the former top at 94.77 likely. The daily chart indicates that a
break through an uptrending Gann angle at 94.59 is likely to be the first sign
of weakness and could lead to an acceleration to the downside. A resumption in
stock market selling pressure should be the catalyst for this break.
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