Improving Economic Outlook Boosts Euro, British Pound

Improving economic outlooks for both the Euro Zone and U.K. arehelping to boost the Euro and British Pound versus the Dollar overnight. Bothcurrencies continue to soar to the upside, driven by strong trend buying andthe lack of overhead resistance.

Improving economic outlooks for both the Euro Zone and U.K. arehelping to boost the Euro and British Pound versus the Dollar overnight. Bothcurrencies continue to soar to the upside, driven by strong trend buying andthe lack of overhead resistance.

Poor U.S. economic data and expectations that U.S. growthcould lose momentum as government stimulus is withdrawn has led investors tospeculate that U.S. interest rates will stay low for a prolonged period oftime.

Even the Wall Street Journal supports the notion that theFederal Reserve will consider using cash the Fed receives when itsmortgage-backed holdings mature to buy new mortgage or Treasury Bonds, insteadof allowing its portfolio to shrink gradually, as it is expected to do in themonths ahead.

At its next policy meeting on August 8, analysts expect theFed members to mull over ways to stimulate the economy including quantitativeeasing. This action by the policymakers will be a signal that there is adeepening concern among members about the economic outlook.

Before the Fed meets, the Bank of England and the EuropeanCentral Bank will have a chance to express their outlooks for their respectiveeconomies on August 5. The BoE is expected to keep its borrowing costs athistorically low levels while explaining how monetary policy and growth will beaffected by the recently imposed austerity measures and tax increases. The ECBwill also leave interest rates unchanged at 1%, but should offer a solidexplanation for the recent surge in economic growth despite talk of a slow downdue to sovereign debt issues only two months ago.

No matter how you look at the central bank meetings, it isclear that the market believes that both the BoE and ECB are closer to raisinginterest rates than the U.S. Fed.

Overnight the U.S. Dollar hit multi-month lows against mostmajor currencies, some of which had not been seen since mid-April. Negative sentiment is building which couldsend the Dollar even lower today as pessimism about the economy continues tobuild.

Some of the pessimism about the economy was fueled by FedChairman Bernanke on Monday when he told a group that the economy has yet torecover fully and monetary policy must remain accommodative. Bernanke also saidit is going to take “significant time” to restore the labor market.

In other news, the Dollar is losing ground to the JapaneseYen despite news that Japanese Minister Yoshihiko Noda said on Tuesday thatexcessive, disorderly moves in the foreign exchange market were undesirable andthat too strong a Yen hurts exports and households. Market participants haveheard this line before which may be the reason for the reaction. This form ofverbal intervention didn’t work in the past to slow down the strength in theYen and is not expected to do so now. It seems that only an actual interventionwill force the Yen lower.

Finally, last night the Reserve Bank of Australia votedto leave interest rates unchanged at 4.5%. The main reason for this action was inline growth and inflation. TheAussie surged initially on the news but pulled back from its highs throughoutthe session. The consensus is the RBA is very content with keeping borrowingcosts at current levels until the economic outlook become clearer.

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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