Forex Traders on Central Bank Watch

The U.S. Dollar is trading better against the Euro and British Pound as Forex traders await today’s European Central Bank and Bank of England Policy statements.

The U.S. Dollar is trading better against the Euro and British Pound as Forex traders await today’s European Central Bank and Bank of England Policy statements. The Dollar is also gaining against the commodity-linked currencies, helped by lower gold and crude oil. Weaker equity markets are putting additional pressure on higher risk currencies while underpinning the lower yielding Japanese Yen.

U.S. Treasury Secretary Geithner is in Beijing this morning to discuss the Chinese currency and other economic issues. The visit by Geithner is a good sign that China is open to the idea of letting its currency rise against the Dollar.

The EUR USD is trading lower overnight. Pressure continues to mount on this currency because of growing concerns that Greece will default on its debt. The spread between Greek Bonds and German Bunds is widening, making it difficult for Greece to finance its debt.

News that German Industrial Production was unexpectedly flat in February is also helping to pressure this currency. A surprise drop in Euro Zone Retail Sales has solidified the thought that the European Central Bank will leave interest rates unchanged this morning. Based on the worsening Greek situation and the poor economy, some traders now believe the ECB will leave interest rates at historically low levels until early 2011. Investors will be watching ECB President Trichet’s comments this morning to see if he has anything new to say about Greece. Some traders expect him to reassure investors that the situation is under control and that nothing unexpected is developing.

Technically, this market is getting dangerously close to the recent main bottom at 1.3267. If today’s ECB policy statement takes on a more dovish tone than expected, then look for selling pressure to drive this market to a new low for the year.

Traders were pleasantly surprised overnight on the news that U.K. Industrial Production was higher than expected. The report showed an increase of 1% versus a pre-report estimate of 0.5%. The British Pound rallied on the news, but not enough to change the trend to up. Technically, this market will remain in a downtrend until the last swing top at 1.5381 is violated. This market is also having trouble piercing a 50% retracement level at 1.5297. Additional resistance comes in at a downtrending Gann angle at 1.5317.

This morning, the Bank of England is expected to leave interest rates unchanged at historically low levels. Despite some improvements in the economy since the last meeting in March, don’t be surprised if the BoE announces an expansion or an extension of its current quantitative easing program to give the economy an additional boost. The policy statement by the BoE may also address the widening budget deficit and its threat to the economic recovery.

Overnight, the USD CHF turned the main trend to up on the daily chart after breaking the last main swing top at 1.0751. In addition, this currency pair crossed to the bull side of a downtrending Gann angle and a major retracement zone at 1.0703 to 1.0749. The weaker Euro is increasing the possibility of an intervention by the Swiss National Bank.

The weaker U.S. equity markets are helping to encourage Japanese investors to seek protection against a substantial sell-off. This repatriation of funds is putting pressure on the USD JPY.

Technically, this market is weakening because of the closing price reversal pattern from earlier in the week. Based on the short-term range of 89.76 to 94.77, the current downside momentum and chart formation indicates a test of 92.26 is likely over the near-term.

Fundamentally, weaker gold and crude oil is helping to trigger a short-covering rally in the USD CAD. Technically, Wednesday’s closing price reversal bottom was confirmed overnight. This pattern suggests a minimum 2 to 3 day rally or a 50% retracement to 1.0138.

The lack of demand for higher risk commodities and equities is helping to pressure the AUD USD. Upside momentum has slowed since the Reserve Bank of Australia raised its benchmark interest rate by 25 basis points to 4.25% earlier in the week. Technically, Wednesday’s closing price reversal top was confirmed overnight. Although a change in trend is not likely at this time, the reversal pattern suggests a 2 to 3 day correction is likely with a test of .9149 possible over the near-term.

The New Zealand Dollar resumed its downtrend overnight following a quick two-day rally. Earlier in the week, the main trend turned down on the daily chart but a short-covering rally stopped the slide after this currency tested a 50% level at .6986. Expectations are that weaker commodity and equity prices will drive this market through the recent main bottom at .6903 to the .618 level at .6942.

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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