This week the EUR USD penetrated the 1.31 price level for
the first time since May. The primary driving forces behind this move were the
better outlook for the Euro Zone economy and the weak outlook for the U.S.
economy. The data out of Europe may have
brought the European Central Bank closer to a rate hike than the Fed.
The GBP USD closed near the high for the week after piercing
a major 50% price level. The strong close put the market over 50% of the 1.7042
(July 2009 Top) to the 1.4229 (May 2010 Bottom) range at 1.5635.
economic data and a better outlook for the U.K.
economy are the reasons for the strength in the Sterling. While the U.S. is still on a spending spree, the U.K.
has been busy implementing austerity measures while reading for tax hikes.
Bullish traders seem optimistic that these two factors are good for the economy
but some traders remain skeptical that spending cuts and tax increases will
curtail the economic recover.
Comments from the Bank of England this week seem to suggest
that it remains cautious about the economy and is willing to continue to
provide stimuli if and when necessary. Recently it was reported that the U.K.
GDP rose more than expected. This provided some lift to the market but poor
housing numbers seem to indicate that the central bank is still far from hiking
The Australian Dollar finished near its high for the week
after a two-day setback. Demand for higher risk assets was the driving force
behind the rally. Earlier in the week, the Aussie weakened because CPI data
suggested the economy had cooled off. This meant that the Reserve Bank of Australia would
most likely refrain from hiking interest rates at its next meeting on August 3rd.
Fridayâ€™s rally suggests that speculators are driving up the market because of
the weak U.S. economy and the likelihood that U.S. interest rates will remain
at historically low levels for a prolonged period of time.
The New Zealand Dollar closed higher on Friday after a
closing price reversal top earlier in the week triggered a 3 day, 50%
correction. This move is typical during a rally. The main problem, however,
which suggests lower markets to follow, is the weekly closing price reversal
Fundamentally, the Reserve Bank of New Zealand hiked its benchmark
interest rate by a quarter-point to 3.00%. The RBNZ, however, said it would
most likely refrain from another rate hike because of expectations of slower
growth. This news triggered the sell-off in the Kiwi. Technically, the reversal
top could be a bearish sign if confirmed. The chart suggests a possible
correction to .6980 over the next 2 to 3 weeks.
The U.S. Dollar traded mostly higher against most major
currencies overnight but gave up some of its earlier gains early in the New York session,
turning negative against the British Pound, Australian Dollar, Canadian Dollar
and New Zealand Dollar while only giving up ground to the Euro and Swiss Franc.
The Dollar traded weaker versus the Japanese Yen all trading session.
This morning the U.S. GDP Report showed the economy grew at
2.4% in the second quarter. This growth was at a pace somewhat slower than
pre-report estimates of 2.5% to 2.7%. A first quarter revision higher may have
been the reason for the limited reaction to the downside in the equity markets
and the reason why the rally stalled in the Dollar.
The biggest concern at this time amongst investors is the
uncertainty of future growth. Continuing to lose growth at the current pace
suggests the U.S. GDP may fall below 2% during the third quarter. This
uncertainty is one of the main reasons why employers may be curtailing hiring,
thereby exasperating the employment situation in this country.
In other reports, the Michigan
confidence index was revised to 67.8 in July and manufacturing activity in Chicago rose more than
expected. The Dollar was able to hold its ground following the release of both
The overnight strength in the Dollar against the majors
except the Japanese Yen was triggered by weak Japanese economic news. Overnight
it was reported that Japanese core consumer prices fell 1% from a year ago. May
industrial production and employment were also negatives.
The Dollar strengthened further after Fed voting member
Bullard said the U.S.
â€śis closer to a Japanese-style outcome today than at any time in recent
historyâ€ť. He also said the best remedy for this developing problem will be
another round of Treasury purchases by the Fed.
Stocks were expected to trade lower today, but a quick rally
following the opening, triggered by value-seeking bottom pickers helped drive
the equity indices higher. This forced short-covering rallies in both the New
Zealand Dollar and Australian Dollar.
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