Uprising in Egypt May Trigger Flight to Safety Rally into U.S. Dollar

The Euro’s closing price reversal top onWednesday was confirmed overnight, indicating that the market may retrace backto 1.3716 to 1.3681 over the near-term.

The Euro’sclosing price reversal top on Wednesday was confirmed overnight, indicatingthat the market may retrace back to 1.3716 to 1.3681 over the near-term.Technically the main trend remains up unless 1.3570 is taken out; however, aclosing price reversal top is often the trigger that begins a change in trend.

Look forthe ECB to announce no change in its interest rate policy statement which willbe released early this morning. All eyes, however, we be focused on ECBPresident Jean-Claude Trichet who is expected to maintain his anti-inflationrhetoric at his post-policy statement news conference. Last month’s mention ofinflation in the January ECB statement shifted its sentiment from dovish tohawkish, setting up a strong month-long rally.

The BritishPound surged this morning following the release of a report which showed U.K.service companies returned to growth in January. Speculators drove the markethigher on the thought that the Bank of England now has room to raise interestrates later this year.

Althoughthe fundamentals support a rally, technical factors are affecting the Sterling this morning.Overbought indicators and oscillators led some traders to take profits as thePound approached the November top at 1.6299. A lower close today will form aclosing price reversal top, setting up a possible two to three day break.

Looking atthe calendar, one would have thought that Friday’s U.S. Non-Farm Payrollsreport would be exerting a strong influence on the Forex markets insteadtraders are focusing their attention to the intensifying clashes in Egypt. Thisuprising could drive up demand for lower yielding currencies such as the U.S.Dollar and the Japanese Yen while pressuring higher risk assets.

Traders areapproaching the Egyptian situation with caution so that they don’t over-reactlike they did last week. News that the military has become involved is theleading factor influencing the Forex markets, however, the move into thesafe-haven Dollar could accelerate should the conflict threaten business on theSuez Canal. Crude oil will be especiallysensitive to any news involving the Suez Canal.

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