The U.S. Dollar started the week on the bull side of the market as its uptrend was expected to remain intact. Trading was anticipated to be defensive. Investors were most likely to remain risk averse while stocks continued to remain weak and the global economic picture was once again moving toward bleak. The overnight rally highlighted the fact that traders were becoming more sensitive to the weakening equity markets and more attracted to safe-haven currencies like the Yen and the U.S. Dollar.
This scenario changed early Monday morning when analyst Meredith Whitney upgraded her recommendation in the Goldman Sachs Group from neutral to buy and made other bullish comments regarding the banking sector. Her comments were the surprise event that equity markets were looking for given the recent downtrend and oversold status. The subsequent short-covering rally in the stock markets forced currency traders to rethink their risk adverse positions and encouraged liquidation to more acceptable sizes given the possible shift in investor sentiment from bullish Dollar to bearish Dollar.
Although it is too early to tell if this is going to lead to a change in trend in the major Forex pairs, it is important to note that a possible short-term bottom may have been formed in the equity markets that could trigger 50% or more retracements in the major Forex pairs.
Traders should note that while Ms. Whitney’s bullish comments may have put in a short-term bottom, the real decision making for the future direction of the Dollar will be based on earnings and economic reports over the next few weeks. Should her bullish comments gain additional support from friendly earnings and economic reports then the Dollar should get hit hard to the downside. If her comments cannot be backed up by solid bullish news then the Dollar is likely to redevelop its temporarily interrupted up trend.
The EUR USD is in a downtrend but having trouble breaking support at 1.3748. This coupled with the banking sector upgrade news could be triggering the start of a short-covering rally. Traders should look for a minor retracement to 1.4015 to 1.4059. A major retracement to 1.4042 to 1.4112 is also possible. Given these two retracement zones, 1.4042 to 1.4059 seems to the key area this pair has to get through to trigger a breakout to the upside.
The USD CAD appears to be running out of gas to the upside which makes this market vulnerable to a correction. Based on the main range of 1.2507 to 1.0783, this pair has been finding resistance at a retracement zone at 1.1634 to 1.1837. Topping out in this area is likely to lead to a short term retracement to 1.1253 to 1.1142.
The USD JPY has been getting hit hard lately due to risk averse Japanese investors repatriating their risk capital back to the homeland. Today’s events which may lead to a prolonged or sizeable rally in the equity markets may have triggered the start of a short-covering rally. This pair just recently completed a retracement to 94.26 to 92.57. Regaining 92.57 on Monday after posting a lower-low for the recent down move sets up a reversal bottom which may trigger a retracement rally to 96.58 to 97.73.
The bearish fundamentals which had been putting pressure on the GBP USD were largely ignored by traders once the stock markets took off to the upside. Looking at the charts, today’s action indicates that a short-covering rally to 1.6362 to 1.6452 is likely.
The USD CHF remained range bound between 1.0590 to 1.1020. Holding above a retracement area at 1.0805 to 1.0754 gives this market a slightly friendly tone. Breaking under this support could trigger a retest of the 1.0590. Everything depends on whether the rally in the equity markets is real or just short-covering.
The fear of holding risky assets has recently pressured the AUD USD and NZD USD to multi-month lows. Today’s rally in the equity markets helped put in reversal bottoms in both of these pairs. Although their down trends are not threatened at this time, both pairs appear to be destined to complete short-covering rallies to retracement zones at .7982 to .8049 for the Australian Dollar and .6392 to .6439 for the New Zealand Dollar.
In summary the battle the next few days will be over an analyst’s comments or economic reality. Traders will have to decide whether to once again become more risk tolerant and bet on the Dollar weakening or let the Dollar weaken before jumping back on the long side. Technical retracement areas may be the deciding factors over whether the Dollar remains weak or strong.