British Pound, Euro Finish Week on Lows

The U.S. Dollar Index finished the week near its high after sharp breaks in the British Pound and Euro drove it sharply higher on Friday.

The U.S. Dollar Index finished the week near its high after sharp breaks in the British Pound and Euro drove it sharply higher on Friday. The close above a retracement zone by the Dollar puts it in a position to challenge the high for the year at 81.70. It was a volatile week for the Dollar. The first half of the week saw the Dollar receiving selling pressure because of the prospect of lower interest rates for a prolonged period. The Dollar posted a strong gain during the second half of the week as renewed risk aversion sentiment encouraged traders to dump higher yielding currencies.

The British Pound was under pressure on Friday as traders took defensive positions out of fear of a double-dip recession in the U.K. Earlier in the week, the GBP USD ran into a resistance zone at 1.5297 to 1.5419. The trend remained down despite the spike higher and selling resumed following a test of this zone. On Friday this market tested the retracement zone formed by the 1.4780 to 1.5381 swing. This zone is 1.5080 to 1.5010. If a secondary higher bottom is going to form, it will do so in this zone. Otherwise a break under 1.5010 will put his market in a weak position.

The EUR USD turned the main trend down on the daily chart following a break through the recent swing bottom at 1.3530. In addition, a retracement zone at 1.3628 to 1.3584 was violated. Downside momentum is building which could take this market back down to the low for the year at 1.3440. Short interest in the commitment of traders report is still large which is contributing to the pressure. Without a Greek/European Union bailout package in place, the fundamentals remain bearish.

Lower equity prices helped to pressure the USD JPY early in the session before short-covering ahead of the three-day holiday in Japan turned the Dollar/Yen higher. The selling started when this pair couldn’t penetrate a .618 level at 90.61 and a downtrending Gann angle at 90.67. This price cluster proved to be solid resistance. Watch for volatility on Sunday and Monday while Japanese traders take a break.

The USD CAD posted a daily closing price reversal bottom indicating the possible start of a short-covering rally. Friday’s trading action was driven by “sell the rumor, buy the fact” as traders reacted as if this report was already factored into the market. Early during the trading session a report came out, which showed that Canadian inflation was higher than estimated. This triggered a sell-off in the Dollar/CAD. Oversold conditions fueled profit-taking on the break which turned this market higher. The key area to regain is 1.0205. If the Dollar/CAD closes over this price then watch for the start of a strong short-covering rally.

The USD CHF finished the day and the week higher. The drop in the Euro fueled the strength on the thought that the Swiss National Bank would have to intervene. Gains were limited on talk that the SNB would not be able to keep interest rates at low levels for much longer. After reaching a major 50% price at 1.0513 and holding, the Dollar/Swiss is now in a position to retrace the recent break to 1.0701 to 1.0748.

Both the AUD USD and NZD USD finished the week higher on the thought their central banks would hike rates before the Fed. The Reserve Bank of Australia has already been raising rates. The Reserve Bank of New Zealand is likely to do this a little after June. Traders were buying these two currencies to take advantage of the interest rate differential. The weakness late in the week for the Aussie and Kiwi are indications that traders are a little concerned about risk. Look for these traders to pare down positions a little more next week if the Greek financial crisis flares up or if U.S. equity markets fall hard.