Increased Optimism sets the Tone for Trading

For the year thus far, the S&P 500 index is in positive territory. With this news the price of Crude Oil has also risen to its yearly high. However, the added buoyancy is hurting the Dollar as traders are taking on greater risk with higher yielding currencies and swapping out their safe-haven investments.

Economic News

USD – Rising Stocks and Housing Data Hurt the Dollar

The Dollar continued its upward correction as a rise in stock markets and better than anticipated economic data fueled further risk-taking in the forex market. The EUR/USD was under pressure during trading hours in Japan and Europe, falling throughout the day. However, the pair failed to break a key support line at 1.3200 and reversed course. Driving this appreciation of the pair were gains in equity markets. The Dow Jones Industrial Average finished the day up 2.61%. Adding further to risk appetite in the market was the release of better U.S. Pending Home Sales data. The release came in surprisingly high, contributing to the sell-off of the Dollar.

Prices could have been exaggerated earlier in the day as liquidity was light due to Japanese markets being closed for “Golden Week”. We may expect further weakness in the Dollar’s crosses as expectations abound to the easing of the global economic recession. This may be seen extensively against currencies linked to commodity prices such as the Aussie Dollar (AUD) and New Zealand Dollar (NZD).

Two major events are on tap for today’s trading. The Institute for Supply Management (ISM) will release its Non-Manufacturing PMI report. This indicator is a key gauge of economic activity and expansion. The reading is expected to show moderate improvement from the previous month’s release. A second event will be testimony from Federal Reserve Chairman Ben Bernanke on the economic outlook before the Joint Economic Committee of Congress. His comments may hint at an improving economic environment, which may in turn hurt the Dollar. We could see the EUR/USD test the 1.3600 resistance line today.

EUR – EUR Continues Bullish Correction

The EUR has risen the past 3 trading sessions against the Dollar. Yesterday was no different as European investors had reason to cheer as positive momentum was given by the Purchasing Manager’s Index reading. This release, along with gains in stock markets helped to boost the EUR against the major currency pairs. The EUR finished at $1.3376 from $1.3315. The EUR/JPY was higher at 132.10 from 131.35. Also the EUR/GBP finished stronger at 0.8945 from 0.8890.

The 16-nation currency has reason to be satisfied in recent days considering the sudden surge in foreign investment, largely due to uncertainty across the safe-haven spectrum. As traders look elsewhere for riskier investments, the Euro-Zone apparently ranks high on the list, and the EUR and GBP appear to be reaping the rewards.

We may see higher-than-average volatility for EUR pairs as traders position themselves over the next few days for the European Central Bank’s (ECB) Interest Rate decision. The market will be looking for not only a 25 point basis rate cut, but also for a quantitative easing program. This would be enacted similar to the program undertaken by the U.S. Federal Reserve to purchase long-term government securities. A failure by the ECB to enact such a program could send the EUR sharply lower against the Dollar.

JPY – Yen Hits 3-Week Low vs. EUR

The Yen has reached a 3-week low against the EUR amid speculation the global recession is easing. The upcoming release of U.S. stress tests is also a negative for the Yen. This has traders dumping the Japanese Yen in favor of riskier, higher yielding currencies. Against the Dollar, the Yen has reversed a bit from its bullish run of the past week. Yesterday the USD/JPY finished the day at 98.80 from 99.45.

Trading during the Japanese session could have higher volatility due to the holiday which concludes Thursday. This time period could have prices pushed further than expected, and the Yen driven by events occurring outside the Japanese economy. Two key events that traders will need to be mindful of for the Yen will be release of U.S. bank stress test results on Thursday and U.S. Non-Payrolls on Friday.

Crude Oil – Crude Hits Yearly High

The price of Crude Oil hit its yearly high during yesterday’s trading as gains in equity markets and heightened optimism helped rally the commodity’s price. An improvement in the global economy will help to boost the demand for energy consumption, adding to the price of Crude Oil. The S&P 500 finished the day in positive territory for the current year, and the weakness of the Dollar has helped to support Crude prices. The price of Crude Oil closed yesterday at $54.00 from $53.20.

Further consensus that the economy is set for a rebound may continue to support the price of Crude Oil. During today’s trading we could see a slight pullback below the $54 mark as traders may be inclined to book profits. However, tomorrow’s Crude Oil Inventories report could send the price back above this level, perhaps breaking the $55 resistance line.

Technical News

The bullish trend is losing its steam and the pair seems to be consolidating around the 1.3390 level. The 4-hour chart’s Slow Stochastic is showing a fresh bearish cross suggesting that a downwards correction might take place in the nearest time frame. When the downwards breach occurs, going short with tight stops appears to be a preferable strategy.
The price of this pair appears to be floating in the over-bought territory on the daily chart’s RSI, indicating a downward correction may be imminent. The downward direction on the 4-hour chart’s Momentum oscillator supports this notion. When the downwards breach occurs, going short with tight stops appears to be the preferable strategy.
There is a fresh bullish cross forming on the 4-hour chart’s Slow Stochastic indicating a bullish correction might take place in the nearest future. The upward direction on the hourly chart’s Momentum oscillator also supports this notion. When the upward breach occurs, going long with tight stops could be a good choice today.
The hourly chart is showing mixed signals with its RSI fluctuating in the neutral territory. However, there is a fresh bullish cross forming on the 4- hour chart’s Slow Stochastic, indicating a bullish correction might take place in the nearest future. When the upwards breach occurs, going long with tight stops may be a wise choice.

The Wild Card

Gold prices rose significantly in the last week and peaked at $903.75 an ounce. However, the 4-hour chart’s RSI is floating in the over-bought territory suggesting that the recent upwards trend is losing steam and a bearish correction is impending. This might be a good opportunity for forex traders to enter the trend at a very early stage.

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