Inflationary Concerns Affecting Risk Sentiment

With interest rate decisions on tap today, many investors appear weary of taking on risk. Should the ECB lift rates today, as is expected, there is potential for the EUR to see a sharp downturn as investors collate the data with China’s adjustment to mean that inflation is becoming a concern and risk may get taken off the table.

Forex Market Trends

Daily Trend no no down down no up
Weekly Trend up up down down up up
Resistance 1.4700 1.6440 83.00 0.8950 1.1010 0.9150
1.4540 1.6270 82.25 0.8745 1.0890 0.9075
1.4440 1.6110 81.25 0.8525 1.0770 0.8950
Support 1.4300 1.5930 80.35 0.8380 1.0660 0.8830
1.4140 1.5750 79.50 0.8275 1.0570 0.8720
1.3970 1.5650 76.11 1.0380 0.8630

Economic News

USD – USD Continues Climb as Chinese Rate Hike Affects Risk

The news of China hiking rates has sent several traders into a risk averse mentality, helping to lift the value of the USD as riskier currencies like the EUR dipped in yesterday’s afternoon and evening sessions. Global growth concerns are coming to the fore with many viewing China’s third rate hike this year as a sign that getting inflation under control has topped their agenda.

The US dollar was seen increasing yesterday as traders began to seek shelter following China’s hawkish monetary policy adjustment. The EUR/USD was seen moving towards 1.4270 yesterday while the GBP/USD fell just below 1.60. A slump in a US manufacturing indicator yesterday also added to the risk averse assessment by most investors. Should Friday’s Non-Farm Payroll (NFP) data continue this trend of disappointment we may see the greenback making long strides against its currency rivals as traders flee risk.

Increased market volatility is on today’s forecast with a significant news day preceding Friday’s ever-pressing NFP release. Most significantly, the US economy will be publishing its ADP Non-Farm Employment Change data on the private sector. Should today’s news foreshadow a dismal employment outlook, there is a possibility that more investment will get pushed towards the safety of the greenback, driving USD values higher.

EUR – Will the ECB Lift Rates Today?

The euro (EUR) has been trading bearish these past several trading days on a recent downgrade of Portugal by Moody’s Investor Services and a general uneasiness about risk following a rate hike by China that may quell some of the region’s recent growth. Inflationary concerns are rising, as signaled by China’s policy adjustment, and pressure may be significant enough to warrant a rate hike by the European Central Bank (ECB) later today.

The last time the ECB council met to discuss interest rates, a statement of mildly hawkish uncertainty was released, and traders took it as a cue that rates may be adjusted in the next session, which is why many are expecting a 50 basis point increase this morning. Should the ECB lift rates today, there is potential for the EUR to see a sharp downturn as investors collate the data with China’s adjustment to mean that inflation is becoming a concern and risk may be off the table.

The euro zone’s interest rate announcement will be made 45 minutes after the Bank of England (BOE) releases a similar statement regarding its monetary policy. England is not expected to hike rates until early 2012, but hints at adjusting its Asset Purchase Facility could lead to shifts among large investment portfolios. Today’s market should be highly volatile and traders will want to be on guard as they traverse today’s investment landscape.

AUD – Australian Employment Sector Data on Tap

The Australian dollar (AUD) was seen trading strongly bearish versus most other currencies yesterday after China’s rate hike began to shift many traders back into risk averse assets. As was anticipated yesterday, news of a rate hike in China pulled strongly down on the value of the Aussie as investors moved away from higher yields in exchange for stores of value.

Yesterday’s news weakened the Aussie, fueled by poor fundamental data on Monday and flat news on Tuesday. With this morning’s release of Australia’s employment sector data, many are expecting the southern nation to begin addressing its growth outlook. Weakening commodity prices are beginning to pull on the nation’s economic growth and the AUD’s meteoric rise has gouged Australia’s exports. The downturn may look dismal from afar, but the runaway inflation caused by the Aussie’s rise was expected to cut into the country’s growth projection eventually. The bearish movement may prove positive for the country’s growth as it fights through an unusually extreme winter.

Oil – Oil Price Rebounds from Technical Shift

Crude Oil prices found support near $94 a barrel Wednesday as sentiment appeared to favor a mild growth in global industry alongside a potential uptick in demand for the black gold. Data releases out of the US and China yesterday were driving many investors back into safe haven assets as most reports suggested a surprise downtick in growth among global industrial output and consumer spending; with dismal consumer confidence reading these past few days from the major economies of the West.

As investors sought safety, the value of crude oil, which has been seen plummeting all week, in fact rose to a weekly high of $96.15 a barrel. A sudden jump in dollar values due to this week’s risk averse environment was expected to drive many investors into short-taking positions on physical assets. The move was not forthcoming, however, as traders took cue from China’s rate hike that oil demand may actually increase through the autumn months. Should Crude Oil sentiment hold steady this week, oil prices may see a flattening out in the days ahead.

Technical News

A bullish engulfing pattern on the weekly chart does not bode well for further declines in the pair. Combined with rising weekly and daily stochastics, a case can be made for additional gains in the EUR/USD. The first resistance level the pair should face is 1.4700 off of the June high and a move above here and the pair would encounter selling pressure at the May high of 1.4940. Should the pair fail to move outside the upper line of the triangle consolidation pattern at 1.4515 the EUR/USD would encounter support at 1.4440 and the lower leg of the triangle which comes in at 1.4130.
The monthly chart shows potential declines for sterling. Falling stochastics point to additional losses in the pair. Traders could be looking for the GBP/USD to decline to 1.5650, a level that offers long term support. Both the 20-month moving average comes in near this area but more importantly this is where the falling trend line from the 2007/2008 highs comes in and sterling could see a technical bounce in this area. This level has further significance as it coincides with the October 2010 lows on the daily. To the upside resistance is found at 1.6150, the top of the current consolidation pattern as well as the previous trend line from the May 2010 low at 1.6280.
A triangle consolidation pattern has formed on the daily chart with the legs forming from the May high and the June low. Judging from the long term trend the USD/JPY would be expected to break lower where support comes in at 80.25. A break here would likely test 79.70 and 79.55. However, a move higher may also be in the cards and a break above the initial 81.10 resistance would target 81.75.
After forming a base near the 0.8300, the pair has risen to test its falling trend line from the February high which comes in at 0.8535, not far from the resistance level at 0.8550. Further resistance awaits the pair as the 50-day moving average. A breach here and the pair could unravel to the mid-May low at 0.8750.

The Wild Card

Spot crude oil prices look to have moved higher from a falling wedge pattern that appeared on the daily chart. Given the measured move from the chart pattern and the current resistance levels, a likely target would be the $104.50-$105.50 range between the mid-May high and the mid-April low. Support is found at the falling wedge line which comes in today just below $94. Forex traders who missed the initial breakout may be patient and wait for a pullback to the wedge line where the pair could bounce higher which often occurs with a wedge chart pattern.

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