Euro Briefly Pierces 1.30; Trend Down but Ripe for Short-Covering Rally

The Dollar Index continued to soar on Tuesday as it touchedits highest level since May 2009. After spending April trading on both sides ofa monthly 50% level, the Index is now in a position to test the .618 price.Based on the major monthly range of 89.62 to 74.17, traders should look for themarket to test 83.72 over the near-term. This market should continue to remainstrong as long at 81.90 holds as support.

The Dollar Index continued to soar on Tuesday as it touchedits highest level since May 2009. After spending April trading on both sides ofa monthly 50% level, the Index is now in a position to test the .618 price.Based on the major monthly range of 89.62 to 74.17, traders should look for themarket to test 83.72 over the near-term. This market should continue to remainstrong as long at 81.90 holds as support.

The Euro traded sharply lower on Tuesday, reaching a12-month low at 1.2993. Although a bailout agreement was reached by the Greekgovernment, the European Central Bank and the International Monetary Fund overthe week-end, bearish traders have shifted their focus to the growing fiscalproblems in Spain and Portugal. Hedgefund and large traders continue to press the short-side, but the technicalbounce after briefly breaking the psychological level at 1.30 may be anindication that this currency is ripe for a short-covering rally.

The sharp break in the GBP USD is an indication thatconcerns are building that the U.K.economy could face similar fiscal problems as Greece. The main concern amonginvestors at this time is the May 6th election. In my opinion, the electionoutcome is expected to yield two results and both of them are bearish to the Sterling.

Firstly, recent polls suggest that the election is too closeto call. This means that a hung parliament is likely. A hung parliament resultswhen there is no clear majority winner following the election. If no majorityis in control of the parliament then it is highly unlikely that moves will bemade to shore up the U.K.economy and budget deficit problem. If this occurs, then the British Pound islikely to weaken because of the threat of a possible credit rating downgradeand the possibility of sovereign debt default.

Secondly, even if a majority party is elected to parliamentand moves are made to try to fix the economy, the first move is likely to bemassive budget slashing. The Pound is likely to break further if the U.K. is forced to make austere financial cutsjust like Greece.Mistimed budget cuts when the economy is in need of stimulus could set the U.K. economyinto a double-dip recession.

The weak Euro sent the USD CHF sharply higher. Tradersexpect the Swiss National Bank to intervene to defend its currency. Based the12-month range of 1.1965 to .9918, the market is now trading inside theretracement zone of this range at 1.0914 to 1.1183. Look for this pair to continueto strengthen as long as the low end of the range holds with the upper end thenext objective. The severely oversold Euro may trigger a short-covering rallyin the Swiss Franc. Aggressive traders have to be careful about chasing thismarket higher.

The drop in gold, crude and equities helped to trigger abreak out rally in the USD CAD. After building a support base in April, thispair finally crossed a swing top at 1.0215 to turn the main trend to up on thedaily chart. Upside momentum indicates that 1.0302 is the next upside objectivefollowed by 1.0366. The weakening Canadian Dollar is most likely pleasing tothe Bank of Canada which hinted last week that a strong currency is likely tohave an impact on inflation and monetary policy. This led this analyst tobelieve that the BoC was intervening to weaken the Loonie. Look for the USD CADto continue to strengthen unless there is renewed demand for higher riskassets.

The AUD USD traded sharply lower on Tuesday. Late last nightthe Reserve Bank of Australiahiked its benchmark interest rate as expected by 25 basis points to 4.50%.Based on comments from RBA Governor Glenn Stevens, this is likely to be thelast rate hike for a while. Stevens feels that the RBA has reached itsobjective by bringing rates back to normal between 4.50% and 5.00%. He furtheradded that he feels inflation was likely to remain in the upper half of theRBA’s target range.

Adding further to the weakness in the Australian Dollar wasthe sell-off in the equity markets. Traders also remain a little cautious as towhether a tighter monetary policy in China will curtail demand forAussie goods and services.

Based on the main weekly range of .8577 to .9387, tradersshould look for the Aussie to correct to .8982 to .8886.

On Tuesday, the NZD USD fell in sympathy with the AustralianDollar and a lack of demand for higher yielding assets. Based on the activityby the RBA, many traders now feel the Reserve Bank of New Zealandwill wait until the second half of the year before raising rates. The chartformation suggests a test of the former top and current breakout area at .7199is likely. If this price fails to hold, then look for a full retracement to.7188 to .7156.

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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