More Bad Economic News Drives Dollar Lower; Fed May Renew QE

The U.S. Dollar was under pressure against most majors onTuesday on speculation the Fed will consider renewing its quantitative easingprogram following next week’s FOMC meeting on August 10. Another round of weakeconomic data also contributed to the weakness in the Greenback which drove theDollar to its lowest level since April against some of the currency pairs.

The U.S. Dollar was under pressure against most majors onTuesday on speculation the Fed will consider renewing its quantitative easingprogram following next week’s FOMC meeting on August 10. Another round of weakeconomic data also contributed to the weakness in the Greenback which drove theDollar to its lowest level since April against some of the currency pairs.

The Dollar opened lower and remained under pressurethroughout the New York session, pressured by weak U.S. consumer spending news,a drop in home sales and a bigger than expected decline in factory orders.

The Greenback’s early morning weakness began following therelease of a bearish article by the Wall Street Journal. According to the WSJ,the Fed will consider using cash from maturing mortgage-bond holdings to buynew mortgage or Treasury Bonds instead of allowing its portfolio to shrink.Insiders believe the Fed’s decision will be heavily weighted by this Friday’sU.S. Non-Farm Payrolls Report.

Some investors are questioning whether the Fed willfollow-through on this symbolic event. The market has already pushed Treasuryyields and mortgage yields to historic lows. Those traders who follow theinterest rate differential believe the Dollar will continue to remain underpressure until interest rates begin to go up. Others believe that eventuallythe weakening U.S.economy will spread globally, triggering a flight to safety rally into theDollar.

The Euro and British Pound remained strong throughout theday ahead of the Bank of England and European Central Bank policy meetings onAugust 5. Both central banks areexpected to keep interest rates unchanged.

The BoE will report on the effects of the new austeritymeasures and tax hikes on current monetary policy. The big issue will bewhether these reforms curtail growth. The ECB is likely to issue a statement onthe state of the Euro Zone following the recent aid package to countries facingsovereign debt issues. Recently strong economic reports have surprisedinvestors, many of whom believed the economy would slow down due to financialausterity measures.

Technically, the strong close in the Euro has the market ina position to test a long-term downtrending Gann angle from the 1.5144 top at1.3394. Sellers may step in at this level. The British Pound tested a .618retracement level at 1.5967. Buying seemed to dry up as the market neared thislevel indicating this market may have reached an overbought point.

Speculation that the weak U.S. economy will adversely affectthe Canadian economy helped the USD CAD gain ground on Tuesday. The Dollar/CADtraded in a tight range, indicating it may be going through a transitionperiod. Although no bottoming signal has been given, the inability to breakthis currency pair in the wake of bearish U.S.economic news may be a sign of either a shift in risk sentiment or positionsquaring ahead of this Friday’s U.S.and Canadian employment data.

The Dollar lost ground to the Japanese Yen despite news thatJapanese Minister Yoshihiko Noda said on Tuesday that excessive, disorderlymoves in the foreign exchange market were undesirable and that too strong a Yenhurts exports and households. Market participants have heard this line beforewhich may be the reason for the reaction. This form of verbal interventiondidn’t work in the past to slow down the strength in the Yen and is notexpected to do so now. It seems that only an actual intervention will force theYen lower.

Finally, last night the Reserve Bank of Australia voted to leave interestrates unchanged at 4.5%. The main reasonfor this action was inline growth and inflation. The Aussie surged initially onthe news but pulled back from its highs throughout the session. The consensusis the RBA is very content with keeping borrowing costs at current levels untilthe economic outlook become clearer.

Technically, the closing price reversal may be a sign of atop. The market will have to confirm the pattern with a break through.9070. This could start a 2 to 3 daybreak.

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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