Dollar Breaks Losing Streak

Buying of the Dollar resumed yesterday as equities finished lower and the U.S. economy showed better than expected manufacturing data. Traders are allocating their positions accordingly as the markets prepare to absorb a glut of economic news in the coming days which may create a level of heightened price volatility.

Economic News

USD – The Greenback Rebounds for the First Time in 3 Days

The U.S currency climbed versus the EUR on Tuesday and recovered against other major currencies after a drop in equities and the Institute of Supply Management’s survey of service businesses showed that sector of the economy contracted at a slower pace last month. The ISM’s non-manufacturing index rose more than analysts expected to 43.7 in April, from 40.8 the previous month. That’s the highest reading since October. Investors began selling the EUR after it hit a monthly high near $1.3440 amid uncertainty about Thursday’s European Central Bank meeting and results of stress tests on U.S. banks. The USD advanced 0.8% to $1.3280 per EUR from $1.3406 yesterday. The Dollar also gained 0.2% to 98.97 yen, from 98.80.

The Dollar increased versus the EUR after Federal Reserve Chairman Ben S. Bernanke said the U.S. economic contraction may be easing and a report showed services industries shrank at a slower pace. Optimistic comments from Federal Reserve Chairman Ben Bernanke and a slower pace of contraction in the service sector have helped to drive the U.S. Dollar higher.

Bernanke’s remarks before the congressional Joint Economic Committee echoed last week’s central bank statement that the economic outlook has improved since March. The Dollar had been under some pressure in the past 4 weeks and was traded in a range of $1.2886 to $1.35 per EUR. However, the greenback is likely to rebound further and advance to $1.30 by the end of the second quarter, according to analysts.

EUR – The ECB May Rates Near Zero Percent

The European single currency retreated slightly off of a monthly high versus the Dollar ahead of a meeting on Thursday of European Central Bank (ECB) policy makers. Some in the market said they were wary of taking on too much risk ahead of Thursday’s policy announcements by the ECB and the Bank of England (BOE).

The Euro-Zone currency fell on speculation the Central bank will cut Interest Rates tomorrow and announce plans to buy debt as part of an initiative to end the region’s recession. The ECB is expected to cut its benchmark rate to a record low 1%, while the BOE is seen holding rates steady at 0.5%, which is also a record low for Britain.

More importantly, market players want to see whether the ECB suggests it will keep cutting Interest Rates along with adopting non-conventional policy measures such as buying long term government securities to stimulate growth. Therefore, the EUR could resume its rally if the ECB opts not to follow the Fed and adopt non-standard monetary policy.

JPY – The Yen Pares Its Losses Versus the USD

Japan’s currency rose against the greenback by the most in more than a week after Reuters reported the government review will show Bank of America Corp. needs $34 billion in new capital, citing a person familiar with the results. The Yen rose as much as 0.8% to 98.17 against the Dollar, the most since April 24. The currency also rose 1.2% against the EUR, to 130.09 from 131.73 in New York yesterday.

The Japanese currency gained as the Fed plans to deliver results of stress tests on U.S. banks that may show about 10 companies in need of additional capital. Economists said that the bank stress tests might rattle market confidence and the recent outbreak of optimism might be due for its own stress test.

OIL – Crude Retreats After Touching 2009 High

Crude Oil prices declined on Tuesday as bulging Oil inventories and falling energy demand outweighed fragile hopes for an economic recovery. Analysts said that even though Oil markets are trading near their highs of the year so far, the market still feels nervous about sustaining these levels. The price settled yesterday 63 cents lower at $53.60 a barrel, after hitting a high for the year of $54.83 a barrel.

Oil prices have recovered from $32.40, the lowest since early 2008. Yet prices remain down sharply from the record high above $147 reached in July, 2008. The slumping economy has battered Crude demand, driving up stockpiles and sending prices down from their record highs. However, improvements in the leading economic indicators increase traders’ confidence that a return to sequential economic growth in second half of 2009 will likely support a rise in Crude Oil prices to as high as $65 a barrel.

Technical News

The pair has recently completed a very strong bearish move, sending the pair to the 1.3250 level. However, after 3 failed attempts to breach through this price level, it appears that the 1.3250 might be a signal for a reversal. Currently, after the 1-hour chart’s RSI has bottomed under the 30 line, it’s pointing up again, also supports this notion. Going long with tight stops might be a good strategy today.
It seems that the Cable’s bullish trend might have reached its end. The daily chart shows that the bullish move which was initiated at the Bollinger Bands’ lower boarder, has reached its upper boarder. Also, a bearish cross on the daily chart’s Slow Stochastic also suggests that a bearish move is expected. Going short might be the preferable choice today.
The pair is currently in the midst of a relatively sharp downtrend as the pair is traded at the 98.10 level. However, it seems that the 97.90 level has turned into a very strong support level. If the pair will manage to breach through it, another sharp bearish move might take place.
The pair continues its volatile behavior from the past couple of weeks, and is currently traded at the 1.1340 level. As a bearish cross appears to be taking place at the 4-hour chart’s Slow Stochastic, a bearish move could be imminent. Going short might be the right choice today.

The Wild Card

Crude Oil
A distinct bullish channel has formed on the daily chart, as Crude Oil is currently traded in its lower section. However, as all oscillators are currently pointing down, it appears that a technical correction could arise. This might be a great opportunity for forex traders to enter the trend at its starting-point.

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