Fed Minutes Push Dollar Lower into Close

The Dollar finished the day near its low as a late session report from the Federal Reserve helped diminish expectations for an interest rate hike.

The Dollar finished the day near its low as a late session report from the Federal Reserve helped diminish expectations for an interest rate hike. Today’s Federal Reserve minutes showed that officials were unconvinced about the strength of the recovery and that inflation should remain under control for now.

Although the Fed had forecast growth for 2010 and 2011, it stated that a faster paced recovery should not be strong enough to quickly turnaround the unemployment rate. In regards to last month’s positive change in the unemployment rate, the minutes said that Fed officials believe that “more than one good report would be needed to provide convincing evidence of recovery in the labor markets”.

In summary, the current action in the Dollar seems to indicate that the recent signs of an improving economy will not sway Fed officials from their belief that the recovery would be gradual relative to past recoveries and that inflation would remain subdued. This leads me to conclude that the Fed will not be raising rates soon, and that it is not concerned about inflation.

In other news, traders shifted their interest once again to higher yielding currencies and assets as the ADP jobs report showed that the jobs lost in the private sector fell at a slower pace than expected. Another report showed that the service sector of the economy improved. Both reports contributed to a sell-off in the Dollar which is a strong indication that risk sentiment is shifting again.

Wednesday’s weakness took place after the U.S. Dollar rallied overnight following yesterday’s closing price reversal bottom. The first objective was met at 77.77 early in the evening, but upside momentum took the market to the upper end of the retracement range at 77.93 where it met strong selling pressure. Today’s weak close indicates a possible resumption of the downtrend with 76.31 to 75.80 the next downside objectives.

The USD JPY gained ground on Wednesday as traders placed bets on a friendly Non-Farm Payroll report this Friday. This market should be watched carefully the next few days to see if there is a noticeable shift in risk sentiment among traders which could pressure the Dollar.

Earlier today, this currency pair completed a retracement of the 93.20 to 91.24 range at 92.22. Gann angle support at 91.28 also limited losses. This angle moves up to 91.53 tomorrow. As long as this angle holds as support, the market will remain strong. Fundamentally, traders reacted slightly to an improving global economy while expectations remain for the Japanese economy to remain under pressure. News of Finance Minister Fujii’s resignation but a little pressure on the market as this event seemed to have been already priced in.

The EUR USD weakened into a retracement area at 1.4350 to 1.4319 before holding and beginning a strong rally. The close over this zone is a positive development which should put the Euro back on pace to challenge a major retracement zone at 1.4680 to 1.4790. Traders will be watching for news regarding a possible bailout of Greece. The Euro could strengthen if it becomes clear the European Union will not bail Greece out of its budget difficulties.

The main trend remains down in the GBP USD but it looks like this market is trying to establish support inside of a retracement zone at 1.6036 to 1.5988. This is a critical area which must hold and attract buyers. If buyers step in and begin to support the Pound, then look for the start of a rally back to 1.6355 over the short-run.

On Thursday the Bank of England will hold its first meeting of the year. Expectations are for the BoE to hold interest rates steady while continuing to provide stimulus to the economy in hopes of the start of a recovery.

The USD CHF showed weakness on Wednesday following a test of a 50% price at 1.0379, but the break seemed tentative as traders may be anticipating intervention action from the Swiss National Bank.

Look for the weakness to continue as long as this market remains under 1.0379, but be careful adding to shorts as the market nears a key retracement area at 1.0212 to 1.01430.

The downtrend in the USD CAD resumed late in the trading session after trading in a tight range overnight. The direction of gold and crude oil will continue to exert the biggest influence on this currency pair. Wednesday’s rally in gold is helping to underpin the Canadian Dollar. Today’s downside action suggests this market is well on its way to a test of an old main bottom at 1.0265. Downside momentum may slow as the market approaches this level on concerns the Bank of Canada may try to weaken its currency.

The AUD USD broke out to the upside as traders renewed their interest in higher yielding assets. The rally above the .618 retracement level at .9144 is positive while the move through .9200 turned the main trend to up. Market participants will now try to establish support at .9144.

The NZD USD weakened overnight while confirming Tuesday’s closing price reversal top, but selling pressure stopped, triggering a short-covering rally which has erased the earlier loss. At this time, the Kiwi is retesting a pair of downtrending resistance angles at .7333 and .7355. The close over these two angles is a sign of higher markets to follow. The chart indicates plenty of room to the upside with the November top at .7523 a potential objective.