The New Zealand Dollar fell for the second consecutive day
following Mondayâ€™s bearish closing price reversal top formation. Wednesdayâ€™s
decline was blamed on a drop in business confidence, but some traders attribute
the weakness to position squaring ahead of tonightâ€™s interest rate decision by
the central bank.
Over the short-run speculators have been driving by the Kiwi
in anticipation of a hike in the key borrowing rate. Traders are looking for a
quarter-point hike to 3 percent. The weakness in the Australian inflation rate
is not expected to have an affect on the Reserve Bank of New Zealandâ€™s decision. Recent
economic data suggests that worries about inflation getting out of control are
strong enough to warrant a rate hike at this time.
reported a lower than expected rise in its Consumer Price Index. This is a
strong indication that the Reserve Bank of Australia is going to refrain from
hiking its benchmark interest rate at its next meeting on August 3rd. Traders
sold the Aussie on the news. Weaker U.S. equity markets helped maintain
the weaker tone in this market.
The U.S. Dollar strengthened following the release of a poor
durable goods report. Economists were looking for a 1.0% increase; the actual
change was reported as -1.0%. Investors did an about face following the release
of this data, buying the Dollar and selling higher risk currencies. Recently
bearish news regarding the economy had been driving down the Dollar. Todayâ€™s
reaction indicates that investors may becoming concerned that a weak U.S.
economy will slow the global expansion. The drop in equity markets also
contributed to the strength in the Dollar. After the bearish report and the
initial reaction, the Dollar settled into a range against most major
This afternoonâ€™s release of the Fedâ€™s Beige Book had a
limited affect on the Dollar. The consensus is the report paints a weak picture
for the economy. The market reacted as if the report was a non-event. The
reason for the flat reaction may have been that this news had already been
factored into the markets since economic reports have been weak and Fed
Chairman Bernanke stated last week that weak employment and slow GDP growth
will continue to plague the economy.
The tone in the market appeared to be pro-Dollar today which
could set up for a rally late in the week once the currency pairs breakout of
their trading ranges.
Technically the Euro is still struggling with the
psychological 1.30 price level. It seems that a close over this level may be
the only way to trigger an acceleration to the upside.
The British Pound closed higher but backed off after testing
a major 50% price level at 1.5635. The driving force behind Wednesdayâ€™s
strength was comments from Bank of England Governor Mervyn King.
King said he thought the 2nd quarter surprise gain in the
GDP was â€śencouragingâ€ť but expects new taxes to keep inflation under control.
This would mean the BoE would not have to aggressively raise rates to keep a
lid on inflation. King also said the central bank policymakers face a
â€śdifficultâ€ť challenge as it seeks to balance the risks for the economy. This
comment was very close to Bernankeâ€™s assessment that the U.S. economy faces uncertainty.
King left open the possibility of more stimuli by stating
that their remains â€śroomâ€ť to move in either direction and pledged to take the
â€śappropriateâ€ť steps going forward in order to encourage a sustainable recovery.
In taking into consideration the state of the economy and
Kingâ€™s comments, one can conclude that the BoE is likely to stay the course and
leave interest rates at historically low levels. This means that the recent
rally in the GDP USD was most likely triggered by a weak U.S. economy rather than speculation that U.K.
interest rates would soon rise. Furthermore, King has to be cautious at this
time because a combination of a rate hike, new taxes and cost cutting may be
too much for the economy to handle at this time. These would be the key reasons
to trigger a decline in British Pound from its current level.
As we approach the end of the week, traders should be more
aware of the action in the U.S.
equity markets. Todayâ€™s action wiped out the gains for the week which could be
an indication that sentiment is shifting away from higher risk assets. This
could pressure the Euro and the commodity-linked currencies while supporting
the Japanese Yen. The strength in the Dollar could begin tonight if Asian
indices decide to follow the U.S.
equity markets lower.
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