Overnight Forex Action Indicates Volatile Theme

A late session surge in Europe is triggering ashort-covering rally in the Euro and British Pound ahead of the U.S. opening.

A late session surge in Europe is triggering ashort-covering rally in the Euro and British Pound ahead of the U.S. opening.The Euro was down sharply overnight as traders reacted to Friday’s bearish U.S. jobs data and the news that Hungaryis the latest candidate for sovereign debt issues.

Over the week-end the Group of 20 major economic powersconcluded their meeting by issuing a more cautious outlook for global growth.Their primary concerns were the European debt crisis and the possibility thatEuropean fiscal consolidation will result in muted global growth. While theEuropean and commodity-linked currencies suffered, the Japanese Yen benefittedfrom a strong surge in flight-to-safety buying.

Shortly before the U.S. opening, the Dollar isstarting to see some pressure. U.S.equity markets have turned positive, driving down the Greenback versus theEuro, British Pound and the riskier Australian, New Zealand and Canadian Dollars.Increased appetite for risk is also pressuring the Japanese Yen. This actionahead of the New Yorkopening appears to be short-covering and only proves that the movement in theDollar will be sensitive to risk sentiment today.

Following the prolonged down move in terms of price and timein the Euro, traders should watch today for a possible closing price reversalbottom. The news is still bearish, but conditions may be oversold and maywarrant a position adjustment before the next round of selling pressure takesplace.

The GBP USD was trading weaker overnight, but shortly beforethe New Yorksession has regained a key retracement zone at 1.4499 to 1.4435. Intra-daytraders should watch to see if a support base can be built at or above 1.4499.This action will be a sign that traders are attempting to form a secondaryhigher bottom which could lead to the start of a new rally.

The stock market will dictate the direction in the USD JPYtoday. A strong stock market should support this pair especially if it can holdabove the 50% price at 91.61 and regain the .618 level at 92.41. A weak stockmarket will drive up the Japanese Yen. Watch the action as the market tradesboth side of 91.61. Holding above it will be a sign of strength while a breakbelow it will most likely lead to more selling pressure.

The main trend is up in the USD CAD but trading conditionsthe past 7 days or so can best be described as choppy. The overnight rallyfailed to reach the last main top at 1.0853 and now appears to be ready toretest a retracement zone at 1.0481 to 1.0394. Look for volatility andsensitivity to the movement in the U.S. equity markets today.

The AUD USD stopped short of reaching its most recent bottomat .8067 before short covering this morning erased most of last night’s losses.The main trend is down, but short-covering could drive this market back to a50% level at .8308 before new selling pressure hits the market.

The main trend turned to down on the daily NZD USD chartlate last week. Trading action overnight confirmed the weakness, butshort-covering ahead of the New Yorkopening could take this market back up to a 50% price at .6706. The strength ofthe short-covering rally will be determined by how it trades at this price.Regaining this level will indicate a surge to the upside. A failure to regainthis level should attract fresh selling pressure.