Risk Appetite and Stock Rally Weakens Dollar Safe-Haven

Witnessing a steady decline during yesterday’s trading sessions, the USD became weakened as traders unwound their Dollar buy positions in exchange for riskier assets, such as stocks. The global stock rally seen yesterday may have been one of the leading causes in the Dollar’s depreciation. With recent market optimism, traders may continue to see a small downward trend in the U.S. Dollar as its positions are unwound in exchange for higher yielding assets.

Economic News

USD – Dollar Falls on Increased Risk Appetite

Investors ditched the Dollar in yesterday’s trading session for more risky assets, indicated by the fact that the Dow Jones climbed by 1.8%. This was sparked by a report from Merck and Company that posted better-than-expected earnings. On top of this, investors became more confident as the new Treasury Secretary, Timothy Geithner, reassured Americans that the Obama administration will do everything in its power to lift the U.S. out of recession.

The Dollar’s drop was also owed to surprising, but again, better-than-expected Pending Home Sales figures that led investors to flee the Dollar during late-hour trading on Tuesday. The Dollar lost ground against all of its main currency pairs; losing 180 pips against the EUR and closing at 1.3006. The GBP/USD rate finished up nearly 200 pips at 1.4391. Additionally, the Dollar was unchanged against the JPY, which closed at 89.57 yesterday.

Looking ahead to today, there are 2 important economic data releases coming out of the U.S. These are the ADP Non-Farm Employment Change report and ISM Non-Manufacturing PMI figures. These are set to be released at 13:15 and 15:00 GMT respectively. Matching, or worse-than-expected results, may push the USD lower against its major currency pairs. However, better-than-expected figures are likely to push the Dollar higher against such currencies as the GBP, EUR, JPY, and CHF. With employment data showing a steady decline, on the other hand, the ADP employment change report is more likely to show negative results. Traders may want to anticipate a negative news week for the USD.

EUR – EUR Records Mixed Results Ahead of Thursday Rate Decision

The EUR was affected by 2 main things in yesterday’s trading. These are the global stock market rally and mixed feelings ahead of Thursday’s Interest Rate decision by the European Central Bank (ECB). The U.S. stock market rally led investors to buy-back into the EUR, and dropping the Dollar, as investors looked for returns on risky investments in Tuesday’s trading.

The EUR appreciated by 180 pips versus the USD to close at 1.3006 in yesterday’s trading. The EUR/GBP pair closed at virtually an unchanged level of 0.9036 ahead of Thursday’s Interest Rate decisions for both the Euro-Zone and Britain. Against the JPY, the EUR rose dramatically by 180 pips to close at 116.53. This was largely due to Japan’s stock market rally. Overall, the EUR, which for the past week has been sold by most traders, is seeing these sell-positions unwind and is now making a small recovery. The question is whether or not this rally will continue throughout today’s trading.

Looking ahead, the EUR today will not be receiving much support from fundamental news events. A service-based price index is expected to show that sentiment in European business will remain largely unchanged since this report’s previous release, and retail sales for the broader Euro-Zone are forecast to drop, indicating further weakness throughout the region. With recent market optimism, it is difficult to determine whether this negative news will offset the unwinding of EUR sell positions, and most analysts say that it won’t. Traders should look for a continuation of the EUR’s recent bullishness, at least in the short-term.

JPY – Weaker Yen inspires Japanese Stock Market Rally

Investors dropped the JPY yesterday, initially inspired by the U.S. stock market rally and the pushed further by better-than-expected home resale figures from the U.S. Japan’s stock market also rallied, as car makers, such as Honda and Toyota, made large gains. Other industries, such as shipping, made big gains as well.

The USD/JPY rate remained unchanged to close at 89.57. Against the Pound, the JPY slid over 170 pips to close at 128.93. Also, the JPY declined by over 180 pips versus the EUR to finish yesterday’s trading session at 116.53. If the Japanese economy continues to publish better-than-expected results during today’s trading, then we can expect much of the same behavior when it comes to the Yen versus its main currency pairs. For now, traders should expect the Yen to remain within its current trends as there is little news which can interrupt its recent behavior.

Oil – Oil Expected to Climb on Middle East Tensions

The price of Crude Oil rose by about $0.68, or nearly 2%, to $40.86, as the Israel-Gaza tensions reappeared on the forefront. Crude prices were expected to fall in yesterday’s trading; however, the resurrection of the conflict prevented this from happening. It is likely that Crude prices will remain unstable in the coming weeks as these tensions continue to add instability to the oil market.

Today, the main event that may determine the price of Oil is the results of the U.S. Crude Oil Inventories at 15:30 GMT. If the release is higher than the forecasted 2.5 million barrels of Oil, then this may lead to a drop in Crude prices later in the day. On the other hand, if the result is lower than this figure, this may help boost the price of Crude Oil higher by the end of today’s trading session.

Technical News

The price appears to be floating in the over-bought territory on the 4-hour chart’s RSI, indicating a downward correction may occur later today. However, the daily chart’s Slow Stochastic indicates a recent bullish cross, signaling a possible continuation of the upward movement. In the short-term traders however may expect a downward correction, but longer-term traders may want to maintain their long positions today.
Most oscillators display this pair floating in neutral territory at the moment, indicating a lack of direction. The 4-hour chart’s Slow Stochastic indicates that the price may hit a bearish cross in the near future, but the weekly chart’s Momentum oscillator is still showing steep downward pressure. Waiting for a clearer signal might be the right strategy today.
The pair continues to hold its range-trading pattern with no clear sign of direction. However, there appears to be a bearish cross on the hourly chart’s Slow Stochastic indicating an imminent downward correction. Going short with tight stops appears to be the right strategy today.
The price of this pair appears to be floating in the over-sold territory on the 4-hour chart’s RSI, indicating an upward correction may be imminent. A bullish cross forming on the 4-hour chart’s Slow Stochastic supports this notion. Going long might be the right choice today.

The Wild Card

It appears a bullish cross has recently formed on the 4-hour chart’s Slow Stochastic, indicating that this pair’s recent upward correction may still have some steam. Now would be a great time for forex traders to join this recent run and capture the remaining profits before the downward trend continues.

Written by: Forexyard.com