Better Fundamentals Needed to Support Pound and Euro Rallies

Daily Analysis

This week’s action in the Forex markets has been dominated by choppy, two-sided trading. Traders seem to be looking for improved risk appetite but can’t find the catalyst that will propel the markets to new highs for the year.

Yesterday’s strong rally in the crude oil market and the spillover buying in the global equity markets has laid a good foundation for a rally in the risk sensitive currencies, but volume has been light and traders non-committal which could be an indication that traders are waiting for more solid economic evidence that an economic recovery is taking place and that financial markets are stabilizing.

GBP USD Analysis

The GBP USD is one of the Forex pairs that seems to be poised to resume its rally but hasn’t received the boost it needs from the economic side of the equation.

Since August 6th when the Bank of England voted to expand its quantitative easing program, the British Pound has been under selling pressure. The idea of flooding the market with more cash has investors concerned that the U.K. economy may not be as strong as estimated over the past few months. Yesterday’s release of the minutes of the BoE meeting also raised concerns that the members of the Monetary Policy Committee may not be on the same page when it comes to reading the state of the economy and providing enough stimulus to trigger a positive response.

Despite these two events, the GBP USD appears to have stabilized as big reversals in crude oil and equity markets have traders focusing on demand for higher risk assets rather than the state of the U.K. economy. Today’s U.K. Retail Sales Report may help traders reach a decision about the direction of the Pound. Economists are predicting a gain in July for U.K. retail sales. This would mark the second consecutive month that this report showed a gain and would be a sign that the nation’s recession was abating.

Technically the British Pound is trading higher for the week, but the charts still indicate plenty of room to the downside should this market falter. If this market is currently making a major top, then look for a break to 1.5376 to 1.4981 over the long-run.

The short-term picture indicates the formation of a range between 1.7042 – 1.6274. This range has created a retracement zone at 1.6658 to 1.6749. This area is the short-term upside objective. If the trend is to remain down, then look for active selling when this zone is tested. A trade through 1.6658 will turn the main trend back to up on the daily chart and will indicate higher markets to follow especially on a close over 1.6749.

EUR USD Analysis

Renewed demand for higher yielding assets is also helping to boost the EUR USD. Last week’s news showing that France and Germany posted gains during the second quarter helped slow down the rate of decline of the recent break, but yesterday’s rally in crude oil and equity markets actually triggered a demand driven rally in the Euro. Traders will be watching for news that the Euro Zone economy is on a path to recovery before committing to the long side in a big way. Investors want to see economic improvements that will give the European Central Bank less reason to cut interest rates.

The technical picture shows a choppy, range bound market. The longer-term range is 1.3736 to 1.4447. This range created a retracement zone at 1.4092 to 1.4008. The low for the month at 1.4045 stopped inside of this range as the market is trying to establish support.

The range for the month is 1.4447 to 1.4045. Based on this range, a retracement zone has formed at 1.4246 to 1.4293. This zone is currently providing resistance. Yesterday’s high stopped inside of this range and the overnight action suggests selling in this area.

A strong rally in crude oil and the equity markets is likely to trigger renewed interest in the Euro this morning. If these two markets can sustain their current upside momentum then look for the Euro to make another run at overtaking the resistance at 1.4246 to 1.4293. A close over 1.4293 will be a sign of strength, but taking out 1.4326 will turn the main trend to up on the daily chart.

These two Forex markets are in down trends on the daily chart. Both are also in a position to test key retracement areas over the near-term. The current rallies in crude oil and the equity markets are helping to trigger short-covering rallies in these currencies. While demand for higher yielding assets has helped to put in short-term bottoms, it is going to take strong economic news to drive these markets to new highs for the year.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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