Wednesday September 8, 2010 - 13:57:35 GMT
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U.S. Dollar Under Pressure but Investors Still Jittery over European Banks
The U.S. Dollar is giving back some of Tuesdayâ€™s gains
overnight but investors remain jittery over European bank concerns.
There are no major U.S. economic reports this morning
which may mean increased volatility early. Later in the day, the Federal
Reserve releases its Beige Book. This report will offer assessments on
different regions of the economy by the central bankâ€™s member banks and is used
by the Fed to determine interest rate policy at its regular meetings.
While not expected to have a major influence on the Dollarâ€™s
direction today, it is likely to clarify the Fedâ€™s recent decision to leave
interest rates at historically low levels and the reasoning behind the Federal
Open Market Committeeâ€™s decision to use the proceeds from its mortgage
investments into Treasury Bonds.
The Japanese Yen hit a 15-year high versus the U.S. Dollar
on Tuesday as investors shed risky assets. Safe haven flows partially triggered
by a report in the Wall Street Journal sent cautious traders scrambling this
morning for protection, driving down the USD JPY.
The WSJ report brought up an issue that had been buried
since July 23 when Europe released its bank
stress test results. If you recall, analysts were expressing concerns about the
methodology of the tests. Traders ignored these concerns at the time and
continued to drive the Euro higher for another two weeks before finally topping
at 1.3334. Tuesdayâ€™s Journal article said that stress tests conducted on
European banks earlier this summer understated some lendersâ€™ holdings of
potentially risky government debt.
Technically, this morningâ€™s sell-off in the USD JPY took out
the August 24 bottom at 83.59, before finally stopping at 83.51. In my opinion
the lack of follow-through to the downside following the break through the
bottom is a sign that investors still feel the Japanese government or the Bank
of Japan is poised to take action to prevent the high priced Yen from hurting
the export market and damaging the economy.
This doesnâ€™t mean the USD JPY will turn its trend around,
but it probably indicates that the bears will take a cautious approach when
pressuring this market rather than applying heavy selling pressure. This type
of trading is likely to prevent whip-saw type action that occurs when a market
gets oversold too fast.
Concerns over the health of the Euro banking system may have
traders by surprise on Tuesday. Coming back from a three-day week-end, many
traders had expected the EUR USD to continue last weekâ€™s rally partially fueled
by Fridayâ€™s better than expected U.S. Non-Farm Payrolls report.
What yesterdayâ€™s WSJ article did was plant a seed of worry
in the minds of investors who believe that the poor performance of the U.S. economy is
the only problem to be concerned about now. While yesterdayâ€™s trading action
doesnâ€™t mean its time to bail on the Euro and buy the Dollar, it does indicate
that perhaps long Euro positions have to be pared as a pre-caution against
another possible round of sovereign debt selling pressure.
Technically, the EUR USD looks pretty busy. Despite Tuesdayâ€™s
sell-off, the main trend on the daily chart remains up with a pair of swing
bottoms at 1.2625 and 1.2587 still intact. Once these bottoms are violated, the
main trend will turn to down.
A break through 1.2587 will also mean that a key 50% level
at 1.2605 will have been violated. This action will set up the market for a
further decline and a possible test of the .618 Fibonacci level at 1.2433.
To some traders looking at the retracement levels, it
appears the market will accelerate to the downside once 1.2605 is violated.
This may not be the case, however, because a major uptrending Gann angle at
1.2536 may impede the break and perhaps trigger a counter-trend technical
On the upside, Monday the EUR USD found resistance on a
downtrending Gann angle from the 1.3334 top at 1.2882 on Wednesday. The closing
price reversal top formed at 1.2919 following a test of this angle was
confirmed on Tuesday. The first objective of this pattern at 1.2773 was reached
this morning. In fact it was exceeded, indicating that further weakness is
Unless some high ranking official refutes the Wall Street
Journal article questioning the risky government debt held by European banks, a
wall of worry is likely to be built along with short positions by hedge funds.
This could lead to the start of a prolonged move down in the Euro.
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