Euro falls as Hope for Bailout Fades

The U.S. Dollar finished down against most major currencies. From the start it was under pressure as trader demand for risk pressured lower yielding currencies.

The U.S. Dollar finished down against most major currencies. From the start it was under pressure as trader demand for risk pressured lower yielding currencies. The early morning weakness in the Dollar helped to drive up demand for high risk equities and commodities. Tuesday’s move by the Fed to leave interest rates unchanged for a prolonged period of time set the tone for today’s weakness.

Overnight the EUR USD traded better on increased demand for higher yielding assets as well as improving conditions in Greece. Early in the session, bullish traders were still factoring in the possibility of a bailout by Germany and France, but this rumor was probably finally put to rest when a spokesman for German Chancellor Angela Merkel’s party said Greece should turn to the International Monetary Fund for aid. After this news the Euro fell back, erasing all of its earlier gains.

The GBP USD was a big gainer. Although this market had broken off its high, it still managed to hold on to an impressive gain. Despite the strong move however, traders have to realize that this is only short-covering and not new buying. Also note that the main trend is still down as no main tops were broken during this current rally.

The initial move to the upside in the British Pound was fueled by a report showing that U.K. Jobless Claims unexpectedly fell in February. The spike to the upside was triggered by the news that the BoE members voted 9 -0 to leave its quantitative easing program unchanged. This news meant that the economy may be improving so much that no new liquidity would have to be pumped into the market. Following this report, a strong up move ensued, driving this market through a pair of 50% levels at 1.5271 and 1.5297. After trading slightly better than these prices, the market has fallen back to test these levels later in the session.

Overnight the Bank of Japan voted to leave interest rates unchanged. In addition, it doubled its loan program designed to combat deflation. The USD JPY traded higher this morning on the news, but failed to hold on to those gains by the mid-session. Stronger demand for equities could not hold the Dollar/Yen higher either. Today’s action indicates that investors feel the move by the BoJ was not strict enough and that additional stimulus may be needed.

The USD CHF traded lower early in the session, but bottomed out after the Euro began to weaken. The direction of the Euro dictated the movement of the Dollar/Swiss throughout the day. The first downside target on the charts was reached last night at 1.0513 overnight, triggering a short-covering rally. The USD CHF came close to making a reversal bottom but nonetheless, today’s action suggests that a short-covering rally may be in the works.

Stronger demand for higher risk assets such as equities, gold and crude oil helped to pressure the USD CAD. Tuesday’s FOMC statement regarding interest rates also indicates that the Bank of Canada may hike rates before the Fed. The trend in this market is decisively lower and likely to continue until this contract reaches parity.

Increased demand for higher yielding currencies drove the AUD USD and NZD USD up. With the U.S. holding interest rates low and the central banks in Australia and New Zealand considering rate hikes, the interest rate differential has shifted back in favor of the Aussie and Kiwi.