The Australian Dollar continued its rally which started on
Tuesday following hawkish comments from the Reserve Bank of Australia. The RBAâ€™s policy
statement turned around a sluggish market by stating that interest rates are
likely to rise despite concerns about inflation and a possible slow down in the
Chinese economy. Greater demand for higher risk assets also fueled todayâ€™s
Technically the Aussie is in a strong position to rally
further. Todayâ€™s close was on a .618 retracement price at .8651, but upside
momentum indicates that this potential resistance zone level is not likely to
hold. This sets up the market for a further rally to the recent main top at
The formation of the secondary higher top in the New Zealand
Dollar is also a strong indication of higher markets to follow. The Reserve
Bank of New Zealand
is likely to follow-the direction of the RBA and hike interest rates a second
time in as many months when it meets on July 28th. Traders are at least
indicating this scenario by covering short-positions in anticipation of another
rate hike. Like the Australian Dollar traders, Kiwi traders seem to have a
better outlook for China
than the rest of the world.
The USD JPY failed in its attempt to make a new move low
early this morning. The strong rally in the U.S. equity markets encouraged
traders to buy Dollars and sell Yen in a resumption of the carry trade
strategy. While a weak outlook for the global economy drove investors into the
lower-yielding Yen, a strong earnings-based equity market rally is likely to
drive them out of the Yen and back into higher yielding assets.
After overnight weakness due to concerns over the slowing
global economy and the upcoming European bank stress tests, the Euro and
British Pound mounted strong recovery rally and finished the day modestly higher.
On Thursday both the European Central Bank and the Bank of
England meet to decide monetary policy. Both central banks are expected to
leave interest rates unchanged but the markets could move depending on what is
said in the subsequent policy statements and press conferences. Traders will be
particularly interested in what ECB President Trichet will have to say about
the state of the Euro Zone economy as well as his opinion on the scope of the
bank stress tests.
Todayâ€™s early strength in the U.S. Dollar and subsequent
weakness later in the session is an indication that traders arenâ€™t sure about
which fundamental event is driving the markets. Lately it has been the weaker U.S.
economic reports that have been sending investors out of the Dollar and into
more risky assets. Overnight it was concerns over the weak global economy and
the European bank stress tests. Volatility is expected to remain high in the
Forex markets as investors wrestle with the soundness of the European bank
balance sheets and the potential loss of momentum in the global economy.
The strong rise in the Euro is keeping the uptrend intact.
The daily chart indicates there is plenty of room to the upside with a
retracement cluster at 1.2783 the next likely target.
Technically, the British Pound is in an uptrend, controlled
by the series of higher tops and higher bottoms. Look for an acceleration to
the upside when the swing top at 1.5228 is violated. The weekly chart indicates
that this market could be headed toward 1.5635 over the near-term.
Donâ€™t expect too much action overnight as traders have
pretty much positioned themselves ahead of Thursday morningâ€™s ECB and BoE
policy announcements. With both central banks expected to keep interest rates
at historically low levels, the movement in these currencies is likely to be
delayed until traders hear from the Trichet of the ECB and King of the BoE.
Trichetâ€™s comments will be listened to more closely as he has more to comment
on. Emphasis will be placed on his assessment of the European bank stress
tests. Traders want to hear that Trichet feels the tests will be stringent
enough so that they can get a correct risk assessment of the condition of the
European bank balance sheets.
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