Forex Market Technical and Fundamental Recap

Today’s Forex Analysis summary.

The EUR USD fell sharply lower on Wednesday as traders got a dose of reality following the release of a worse than expected U.S. Retail Sales Report. The report showed that despite growing optimism in the economy, U.S. consumers continued to hold on tightly to their money. This sent a signal to Euro traders that the global economic recovery may not be as swift as some anticipated but rather a long drawn out process.

Technically, the Euro posted a daily reversal top at 1.3722. This top was slightly below the March high at 1.3737. The current chart pattern suggests a break to 1.3303 is likely.

The news was not all that pleasant for the U.K. economy either as the Bank of England reported fresh signs that the anticipated economic recovery would be slow and drawn out.

In my opinion the most bearish announcement was the projection of below target inflation for the next three years. This news was the real cause of the weakness in the GBP USD as it indicated the BoE would have to step up its government asset buyback program.

If you recall, the buyback program is known as quantitative easing. QE is another way of saying �flood the economy with cash�. This action leads to a debasing of the currency. As long as investors feel the BoE will have to act aggressively, long-term gains in the Pound should be limited.

The market posted an inside move on Wednesday. A break through 1.5086 will take out yesterday�s low and signal the start of a possible retracement to 1.4874.

On Wednesday, the USD JPY fell as weak economic news in the U.S. triggered a profit-taking break in the equity markets. This action led to a reversal in the carry trade, a strategy in which traders borrow the lower yielding currency to invest in higher yielding assets.

The break through the last main bottom at 95.62 turned the main trend to down on the daily chart. Traders have to be careful selling weakness at current levels because the market is approaching a key 50% retracement price at 94.28. Patient traders may get a chance to sell at a better price if they wait for a retracement back to 97.44.

Weakness in the equity and commodity markets spilled over to the USD CAD as this pair continued its two-day short-covering rally. The current rally taking place is a combination of both technical and fundamental factors.

Technically, this pair is following through to the upside following a closing price reversal bottom at 1.1474 on May 11. The chart pattern suggests a possible rally all the way back to 1.1991. The short-covering rally could be limited if stocks retrace to the upside or if crude oil continues to show strength. The key to the developing short-covering rally will be the establishment of higher bottom support at 1.1626.
Fundamentally, traders have to be concerned about possible developing weakness in the Canadian economy. So far the current rally in the Canadian Dollar has been triggered by higher equity markets and stronger crude oil. What traders may want to see is confirmation that the Canadian economy is bottoming. Last week, the Canadian jobs report showed that jobs were added, but traders may want to see improvements in other areas including production, housing and retail sales.

Remember this current rally was triggered by the Bank of Canada�s decision to refrain from applying quantitative easing until it was able to see if its interest rate cuts were having an impact on the economy. If reports show the economy is slowing then the BoC may use QE for stimulus. This would weaken the Canadian Dollar and send the USD CAD sharply higher.

Swiss Franc investors did not like the news that U.S. retail sales were worse than expected. The recent break in the USD CHF suggests that Swiss traders had been betting heavy on a turnaround in the U.S. economy. Now that it looks like the U.S. economic recovery will occur at a slower pace than previously estimated, Swiss traders have once again become risk averse while seeking the safety of the U.S. Dollar.

Technically, the USD CHF posted a daily closing price reversal bottom. If Swiss trader appetite for risk diminishes, then look for a follow-through rally to the upside to confirm this current short-term bottom at 1.0976. The current chart set-up suggests a minor retracement to 1.2601 or a major retracement to 1.1359.

The AUD USD continued its short-term break as traders are becoming more averse to risk since the global equity markets topped late last week. This move could continue to the downside as formerly optimistic traders begin to realize that the Australian economy cannot support such lofty levels at this time.

As long as the Aussie economy remains weak and trader appetite for risk declines, then look for the AUD USD to continue down until it reaches a more realistic valuation area. The charts indicate that this area is between .7266 to .7198.

NZD USD traders have known for weeks that the current rally would not last given the weak state of the New Zealand economy. Traders have finally turned pessimistic after taking a realistic look at the weak economic fundamentals. Investors are learning that this current rally has been driven by trader appetite for risk rather than sound economic reasons. This means that longs who bought the recent breakout to the upside may feel some pain if the global equity markets begin its long-awaited correction.

The current chart pattern suggests that the NZD USD is on pace to retrace to at least .5886 to .5730. At this point traders will have to take a look at the fundamentals once again to see if anything has changed.

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