Dollar Rises on Greek Concerns; Weaker Commodity Prices

The U.S. Dollar is trading higher overnight as Greek financial concerns drive the Euro lower, poor economic news weakens the British Pound and demand for commodity-linked currencies fall as China may raise rates during the second quarter.

The U.S. Dollar is trading higher overnight as Greek financial concerns drive the Euro lower, poor economic news weakens the British Pound and demand for commodity-linked currencies fall as China may raise rates during the second quarter.

The Dollar finished higher against most major currencies on Tuesday, boosted by renewed trouble in Greece and comments from the minutes of the Fed’s last meeting.

Greece’s problems are resurfacing due to speculation that it will not be able to service its debt. The troubled country is reportedly asking for more favorable interest rates on loans from the European Union and to amend certain parts of the bailout proposal from the International Fund.

The spread between Greek Bonds and German Bunds has been widening, indicating that investors are asking for more protection in case of a default by Greece.

The Dollar received a late session boost on Tuesday following the release of the minutes from the last Fed Open Market Committee meeting. Investors were reacting to the debate by the Fed members over the use of the term “extended period” which has been used in several of the recent Fed policy statements.

The term “extended period” has been difficult for analysts to translate into a specific time period because of its ambiguity. The central banks of Canada and New Zealand have been more specific with their forecasts as to when rates will most likely rise in these two countries while the U.S. Fed remains unclear. Analysts have been looking for the Fed to clarify this statement to remove some of the speculation from the markets. Based on comments in the minutes, many analysts now believe the Fed will remove “extended period” from its next statement on April 28th.

In addition to discussions about the use of terms, the Fed also reduced its forecast for economic growth and inflation.

The main trend on the daily chart turned down in the Euro on Tuesday when the market crossed the last swing bottom at 1.3384 and to the bearside of a minor retracement zone at 1.3402 to 1.3370.

Overnight a European Union report showed that fourth quarter gross domestic product in the Euro area fell to 0.0% versus an earlier estimate of 0.1%. This could be the effect of the financial turmoil caused by Greece. Although these results were expected, traders continued to pressure the Euro as conditions regarding Greece have not changed enough to warrant a better outlook for the first quarter GDP. Losses may have been limited by an increase in Euro Zone Final Services PMI and a higher PMI Composite figure.

The drop in 4Q GDP is leading analysts to believe the European Central Bank will leave interest rates unchanged at tomorrow’s meeting.

The GBP USD is under pressure this morning as U.K. services industries expanded less than forecast. These poor results are likely to keep downward pressure on interest rates when the Bank of England meets tomorrow. In addition, traders should watch for the possibility of an expansion of its quantitative easing program. U.K. PMI fell 56.5 from 58.4. A reading of 58 was expected. The Index of Services Data grew only 0.6% versus a forecast of 0.8%. The unexpected drop in both of these reports reduced the bullish impact of the recent better than expected 4Q GDP report.

Besides the sluggish economy, the British Pound faces a surging deficit, worries over debt quality and political uncertainty. Since the election date has been set at May 6th, expectations are for this currency to remain under pressure until at least that time. It is highly doubtful that traders will buck the downtrend and buy the Pound into the election especially since recent polls still suggest the strong possibility of a hung parliament.

Lower demand for higher risk assets is helping to pressure the USD JPY. Technically, this market has been under pressure since Monday’s closing price reversal top. The chart pattern suggests a minimum 2 to 3 day break with a possibility of a near-term decline to a 50% level at 92.26.

On Tuesday the Bank of Japan voted to keep interest rates at 0.1%. It also decided to retain its monthly government bond purchases at 1.8 trillion Yen as expected. The weak economy is forcing the BoJ to maintain an “extremely accommodative” financial environment. At this time it feels that beating deflation is still its “critical challenge”. Based on recent government reports, the economy is expanding but far from a sustainable recovery stage. The current recovery remains insufficient while downside risks remain high.

Finally, talk is circulating that China may raise interest rates during the second quarter. This may hurt demand for commodities and raw materials. The commodity-linked Australian Dollar, New Zealand Dollar and Canadian Dollar are down overnight as traders lighten up long positions.

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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