U.S. Dollar could be Forming Major Top

The U.S. Dollar traded sharply lower on Thursday, giving thefirst indication in weeks that the event driven rally may be coming to an end.Pressure was on the Dollar all day led by the strong turnaround in the Euro.Additional pressure came from increased interest in stocks and commodities.

The U.S. Dollar traded sharply lower on Thursday, giving thefirst indication in weeks that the event driven rally may be coming to an end.Pressure was on the Dollar all day led by the strong turnaround in the Euro.Additional pressure came from increased interest in stocks and commodities.Technically, overbought conditions also contributed to the Dollar’s weakness.The current chart pattern suggests the formation of a possible double-top witha confirmation set to take place when this index takes out the last main bottomat 85.33.

Easing tensions in the Euro Zone helped to boost demand forhigher risk assets on Thursday. Since last week, the Euro has been trying toform a bottom but has been met by both fundamental and technical obstacles inthe process. On Wednesday, rumors that China was re-evaluating itsEuro-denominated bond portfolio sent the single-currency lower along with crudeoil and stock indices. Overnight trading was another story however.

Wednesday night China’s foreign exchange reservesmanager denied a news report that it was considering the sale of some of itsholdings of Euro-denominated bonds. Thishelped the Euro rebound, sending the Dollar lower against most currency-linkedcommodities. With the Dollar trading lower, demand for higher risk assetsrose.

Stronger demand for higher yielding assets also helped todrive up the commodity-linked Australian, New Zealand and Canadian Dollarswhile pressuring the lower-yielding Japanese Yen.

The EUR USD was firm all day. This morning’s rally drove theEuro into a Fibonacci retracement level at 1.2345. Additional resistance wascoming in at a downtrending angle at 1.2371. Regaining both of these pricescould trigger a further rally to the 50% price at 1.2407.

Regaining the retracement zone is the first step in thebottoming process for the Euro. The next step will be crossing a mains swingtop. At this time the main trend remains down until the last swing top at1.2671 is violated.

The GBP USD moved higher and away from the support base ithas been building over the last five days. Based on the short-term range of1.5391 to 1.4229, traders should look for a near-term retracement to 1.4810 to1.4947. A more optimistic view of the financial situation in the Euro Zone andacceptance of some of the proposed austerity measures by the newly formed U.K.government are acting as catalysts for the current developing strength.

The USD CHF traded weaker after confirming its closing pricereversal top at 1.1695. Downside momentum is building which could drive thismarket into the retracement zone at 1.1309 to 1.1218. A easing of pressure onthe Euro is helping to trigger the rally in the Swiss Franc.Traders feel that a rally in the Euro will allow the SwissNational Bank to ease up on its constant intervention in the market.

Increased demand for higher yielding assets helped to boostthe USD JPY. Trading has been quiet lately indicating impending volatility.Watch for a surge in U.S.equities to trigger a quick rally back to 91.61 over the near-term. As investorappetite for risk grows they begin to favor a strategy which involves borrowingin Japanese Yen to buy other higher risk assets such as U.S. stocks. In order to do this, theymust sell the Yen and buy the Dollar.

Strong crude oil helped to pressure the USD CAD. Once againthis market rejected the former top at 1.0738. Downside momentum drove thismarket to a 50% level at 1.0481. If momentum continues to grow and crude oiland stocks continue to rise, then look for further weakness to 1.0394 over thenear-term.

The AUD USD soared throughout the day on increased investorappetite for risk. Stronger global equity markets were the catalysts behindThursday’s. The daily chart indicates that there is plenty of room to theupside with a possible retracement to .8727 to .8883 likely over theshort-run. Resistance may come intomorrow at a downtrending Gann angle at .8707.

The NZD USD confirmed its closing price reversal bottom at.6560 from May 25th. The daily chart indicates that this market could retraceback to .6942 over the near-term.

Barring any fresh bearish news out of the Euro Zone or anythreats from China to stop investing in Euro bonds, it looks as if the muchawaited profit-taking break in the U.S. Dollar has begun. Although the maintrend is up, it isn’t going to take much to weaken the Dollar. Extremelyoversold conditions in foreign currencies and nervous short traders could turnthe heat up on the Dollar rather quickly.

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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