Shift in Risk Sentiment Boosting U.S. Dollar

A drop in global equity markets is helping to boost the Dollar as traders shift out of higher yielding assets.

A drop in global equity markets is helping to boost the Dollar as traders shift out of higher yielding assets. The Dollar started out weaker overnight as traders returned after a U.S. holiday, but it turned higher on technical factors and surprise economic data from competing nations. Shortly before the opening, the Dollar is trading higher versus most major markets except the British Pound. This could shift as overnight downside pressure on the Pound seems to be building.

The EUR USD continues to take a pounding as European finance ministers prepare to discuss Greece’s debt problems. Fears of a potential Greece default and additional credit market woes in Spain, Portugal and perhaps Ireland are weighing on the Euro.

Traders expect the European finance ministers to hold their ground and maintain that Greece solves its own problems. This could be an indication that this problem will persist as Greece is having problems reaching a budget decision.

News that German investor confidence declined more than expected is helping to draw additional selling pressure. Speculators are beginning to price in the possibility the Euro Zone economy may be stalling. This report could be proof that the Euro Zone recovery is falling behind the other major economies.

Technically, the EUR USD is finding resistance at downtrending Gann angle resistance at 1.4404. Overnight, the market failed to hold a retracement zone at 1.4386 to 1.4346, which indicates further weakness is likely. This area is likely to act as a pivot zone over the near-term.

The GBP USD originally soared to the upside on the news that Kraft was about to acquire Cadbury PLC. The news of the acquisition originally drew bids from British Pound traders who helped maintain its early upside bias. The violation of key technical resistance levels also helped to send the market higher. This was most likely a follow-through rally following yesterday’s improving U.K. housing report.

Overnight, the British Pound pierced a 50% resistance level at 1.6355, but fell short of a test of the .618 level at 1.6478. Additional resistance was provided by downtrending Gann angle resistance at 1.6438.

Higher than expected consumer inflation helped drive the British Pound lower after an initial spike following the release of the report. Today’s report showed that inflation had accelerated at a record pace. It also was proof that the Bank of England stimulus plan is working, and that there is no need for further stimulus measures. The BoE stimulus activity did its job but stopping the threat of inflation, but has helped put inflation back on the agenda.

Technically, the overnight action in the British Pound has put this market in a position to post a daily closing price reversal top. All that is needed is a lower close, and the GBP USD will be set up for a substantial break to the downside. Preliminary chart work suggests there is room to correct to 1.6176 over the near-term.