Pound Weakens; Investors Cite Worries over Austerity Measures

This morning the GBP USD continued its downtrendby breaking a minor .618 retracement level at 1.5457. Buyers stepped in torally the Sterling,but the buying power wasn’t strong enough to post a daily closing pricereversal bottom.

This morning the GBP USD continued its downtrend by breakinga minor .618 retracement level at 1.5457. Buyers stepped in to rally the Sterling, but the buyingpower wasn’t strong enough to post a daily closing price reversal bottom. Atthe midsession, the British Pound found resistance on a downtrending Gann anglefrom the 1.5997 top at 1.5757. The subsequent selling pressure and the closebelow the Fib level indicates lower markets to follow. The charts indicate themarket is set-up for a potential freefall to a major 50% level at 1.5113.

The catalyst behind the weakness in the Sterling remains growing concern that thenewly implemented austerity measures and tax hikes will curtail the current economicexpansion.

After sitting inside of a range for six days while waitingfor a decision from the Japanese government and the Bank of Japan regarding apossible intervention, the USD JPY finally broke to a new low for the year onTuesday. Volatility which had been compressed while the market remained insidethe range, expanded.

Traders ignored strong words from Japanese Finance MinisterYoshihiko Noda sending a signal that they believe the Japanese government andthe Bank of Japan were not ready to back up those words with direct marketaction.

Noda said at a new conference that the recent moves in theJapanese Yen are clearly one-sided and that disorderly moves can be harmful toeconomic stability. In the recent past traders would have responded to this“verbal intervention” by covering short Dollar/Yen positions, but this time,having heard this language before, decided to ignore the comments and react togrowing global demand for safer lower-yielding assets instead.

This morning the markets reacted as if it was business asusual. Investors shed risky assets and placed the proceeds into the loweryielding Japanese Yen for safe-keeping. This drove the Yen higher. Theredoesn’t seem to be any disruptive trading or overt speculation at this time. Thisis probably frustrating to Japanese officials who seem to believe that there isdisorder in the markets.

While it may be true that the high priced Yen can have adetrimental effect on the economy, nothing is going to stop the decline ifinvestor sentiment is triggering a shift out of risky assets.

Japanhas not intervened in the currency markets since 2004. At that time it sold 35trillion Yen in 15 months through March 2004. The markets today are a littlemore sophisticated. Institutions and hedge funds have the power to combat acentral bank’s intervention which is probably why Japanese officials arehesitant at this time to make such a move.

If Japanintervenes and the market absorbs the great influx of Yen supply then theaction will have no long-term effect on valuation and only serve to put moreYen into the open market.

Another reason why a successful intervention is not likelyat this time is that in order to work, an intervention has to have thecooperation of other central banks. With all nations seemingly battlingeconomic woes of their own, this cooperation doesn’t seem forthcoming at thistime.

Technically, the USD JPY main trend is down. The trend willchange to up on a move through 85.91, but this seems unlikely at this timesince the old bottoms at 84.73 and 84.89 are likely to become new resistanceand limit gains.

The AUD USD closed lower. Traders dumped risky assets thismorning as the outlook for the global economy worsened. Traders are alsoworried about the outcome of last weekend’s election. The longer the hungparliament situation lingers, the more confidence investors lose. Investorswant the election settled so that stability can return to the country. At thistime questions have to be answered regarding the taxing of mining companies.The newly proposed taxes will have a direct effect on Australian exports. Downside momentum could drive this market intoan uptrending 50% Gann angle at .87.17.

The Euro finished higher after testing a major 50% level earlyin the trading session. Technically the market is trading inside of the 1.1876to 1.3334 range. The mid-point of this range is 1.2605, the Fibonacciretracement price is 1.2433.

This morning the market tested 1.2605 and penetrated itslightly before regaining it slightly after the U.S. opening. At the mid-session,the EUR USD was trading higher and by the close, posted a daily closing pricereversal. This pattern often leads to the start of a 2 to 3 day rally.

All is not rosy however for the Euro. If sellers continue toexert pressure and 1.2605 fails to hold on the next retest, then look for themarket to continue to decline to 1.2433.

Trading could be light and tight on Wednesday, one dayahead of Federal Reserve Chairman Bernanke’s speech before central bankers at theconference at Jackson Hole, Wyoming.