Weak Outlook for U.S. Economy Pressure Dollar

This week the EUR USD penetrated the 1.31 price level forthe first time since May. The primary driving forces behind this move were thebetter outlook for the Euro Zone economy and the weak outlook for the U.S.economy. The data out of Europe may havebrought the European Central Bank closer to a rate hike than the Fed.

This week the EUR USD penetrated the 1.31 price level forthe first time since May. The primary driving forces behind this move were thebetter outlook for the Euro Zone economy and the weak outlook for the U.S.economy. The data out of Europe may havebrought the European Central Bank closer to a rate hike than the Fed.

The GBP USD closed near the high for the week after piercinga major 50% price level. The strong close put the market over 50% of the 1.7042(July 2009 Top) to the 1.4229 (May 2010 Bottom) range at 1.5635.

Weak U.S.economic data and a better outlook for the U.K.economy are the reasons for the strength in the Sterling. While the U.S. is still on a spending spree, the U.K.has been busy implementing austerity measures while reading for tax hikes.Bullish traders seem optimistic that these two factors are good for the economybut some traders remain skeptical that spending cuts and tax increases willcurtail the economic recover.

Comments from the Bank of England this week seem to suggestthat it remains cautious about the economy and is willing to continue toprovide stimuli if and when necessary. Recently it was reported that the U.K.GDP rose more than expected. This provided some lift to the market but poorhousing numbers seem to indicate that the central bank is still far from hikingrates.

The Australian Dollar finished near its high for the weekafter a two-day setback. Demand for higher risk assets was the driving forcebehind the rally. Earlier in the week, the Aussie weakened because CPI datasuggested the economy had cooled off. This meant that the Reserve Bank of Australia wouldmost likely refrain from hiking interest rates at its next meeting on August 3rd.Friday’s rally suggests that speculators are driving up the market because ofthe weak U.S. economy and the likelihood that U.S. interest rates will remainat historically low levels for a prolonged period of time.

The New Zealand Dollar closed higher on Friday after aclosing price reversal top earlier in the week triggered a 3 day, 50%correction. This move is typical during a rally. The main problem, however,which suggests lower markets to follow, is the weekly closing price reversaltop.

Fundamentally, the Reserve Bank of New Zealand hiked its benchmarkinterest rate by a quarter-point to 3.00%. The RBNZ, however, said it wouldmost likely refrain from another rate hike because of expectations of slowergrowth. This news triggered the sell-off in the Kiwi. Technically, the reversaltop could be a bearish sign if confirmed. The chart suggests a possiblecorrection to .6980 over the next 2 to 3 weeks.

The U.S. Dollar traded mostly higher against most majorcurrencies overnight but gave up some of its earlier gains early in the New York session,turning negative against the British Pound, Australian Dollar, Canadian Dollarand New Zealand Dollar while only giving up ground to the Euro and Swiss Franc.The Dollar traded weaker versus the Japanese Yen all trading session.

This morning the U.S. GDP Report showed the economy grew at2.4% in the second quarter. This growth was at a pace somewhat slower thanpre-report estimates of 2.5% to 2.7%. A first quarter revision higher may havebeen the reason for the limited reaction to the downside in the equity marketsand the reason why the rally stalled in the Dollar.

The biggest concern at this time amongst investors is theuncertainty of future growth. Continuing to lose growth at the current pacesuggests the U.S. GDP may fall below 2% during the third quarter. Thisuncertainty is one of the main reasons why employers may be curtailing hiring,thereby exasperating the employment situation in this country.

In other reports, the Michiganconfidence index was revised to 67.8 in July and manufacturing activity in Chicago rose more thanexpected. The Dollar was able to hold its ground following the release of bothreports.

The overnight strength in the Dollar against the majorsexcept the Japanese Yen was triggered by weak Japanese economic news. Overnightit was reported that Japanese core consumer prices fell 1% from a year ago. Mayindustrial production and employment were also negatives.

The Dollar strengthened further after Fed voting memberBullard said the U.S.“is closer to a Japanese-style outcome today than at any time in recenthistory”. He also said the best remedy for this developing problem will beanother round of Treasury purchases by the Fed.

Stocks were expected to trade lower today, but a quick rallyfollowing the opening, triggered by value-seeking bottom pickers helped drivethe equity indices higher. This forced short-covering rallies in both the NewZealand Dollar and Australian Dollar.

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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