Pound Weakens; Investors Cite Worries over Austerity Measures
This morning the GBP USD continued its downtrend by breaking
a minor .618 retracement level at 1.5457. Buyers stepped in to rally the Sterling, but the buying
power wasnâ€™t strong enough to post a daily closing price reversal bottom. At
the midsession, the British Pound found resistance on a downtrending Gann angle
from the 1.5997 top at 1.5757. The subsequent selling pressure and the close
below the Fib level indicates lower markets to follow. The charts indicate the
market is set-up for a potential freefall to a major 50% level at 1.5113.
The catalyst behind the weakness in the Sterling remains growing concern that the
newly implemented austerity measures and tax hikes will curtail the current economic
After sitting inside of a range for six days while waiting
for a decision from the Japanese government and the Bank of Japan regarding a
possible intervention, the USD JPY finally broke to a new low for the year on
Tuesday. Volatility which had been compressed while the market remained inside
the range, expanded.
Traders ignored strong words from Japanese Finance Minister
Yoshihiko Noda sending a signal that they believe the Japanese government and
the Bank of Japan were not ready to back up those words with direct market
Noda said at a new conference that the recent moves in the
Japanese Yen are clearly one-sided and that disorderly moves can be harmful to
economic stability. In the recent past traders would have responded to this
â€śverbal interventionâ€ť by covering short Dollar/Yen positions, but this time,
having heard this language before, decided to ignore the comments and react to
growing global demand for safer lower-yielding assets instead.
This morning the markets reacted as if it was business as
usual. Investors shed risky assets and placed the proceeds into the lower
yielding Japanese Yen for safe-keeping. This drove the Yen higher. There
doesnâ€™t seem to be any disruptive trading or overt speculation at this time. This
is probably frustrating to Japanese officials who seem to believe that there is
disorder in the markets.
While it may be true that the high priced Yen can have a
detrimental effect on the economy, nothing is going to stop the decline if
investor sentiment is triggering a shift out of risky assets.
has not intervened in the currency markets since 2004. At that time it sold 35
trillion Yen in 15 months through March 2004. The markets today are a little
more sophisticated. Institutions and hedge funds have the power to combat a
central bankâ€™s intervention which is probably why Japanese officials are
hesitant at this time to make such a move.
intervenes and the market absorbs the great influx of Yen supply then the
action will have no long-term effect on valuation and only serve to put more
Yen into the open market.
Another reason why a successful intervention is not likely
at this time is that in order to work, an intervention has to have the
cooperation of other central banks. With all nations seemingly battling
economic woes of their own, this cooperation doesnâ€™t seem forthcoming at this
Technically, the USD JPY main trend is down. The trend will
change to up on a move through 85.91, but this seems unlikely at this time
since the old bottoms at 84.73 and 84.89 are likely to become new resistance
and limit gains.
The AUD USD closed lower. Traders dumped risky assets this
morning as the outlook for the global economy worsened. Traders are also
worried about the outcome of last weekendâ€™s election. The longer the hung
parliament situation lingers, the more confidence investors lose. Investors
want the election settled so that stability can return to the country. At this
time questions have to be answered regarding the taxing of mining companies.
The newly proposed taxes will have a direct effect on Australian exports. Downside momentum could drive this market into
an uptrending 50% Gann angle at .87.17.
The Euro finished higher after testing a major 50% level early
in the trading session. Technically the market is trading inside of the 1.1876
to 1.3334 range. The mid-point of this range is 1.2605, the Fibonacci
retracement price is 1.2433.
This morning the market tested 1.2605 and penetrated it
slightly before regaining it slightly after the U.S. opening. At the mid-session,
the EUR USD was trading higher and by the close, posted a daily closing price
reversal. This pattern often leads to the start of a 2 to 3 day rally.
All is not rosy however for the Euro. If sellers continue to
exert pressure and 1.2605 fails to hold on the next retest, then look for the
market to continue to decline to 1.2433.
Trading could be light and tight on Wednesday, one day ahead
of Federal Reserve Chairman Bernankeâ€™s speech before central bankers at the
conference at Jackson Hole,
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