The key market moving event today is the strength of the U.S. Dollar. After trading sideways most of the week, the U.S. Dollar surged against the Euro and the British Pound late Wednesday after the release of the U.S. Federal Open Market Committee minutes.
The minutes from the Federal Reserve’s meeting last month showed that few Fed members sided with the implementation of additional asset purchases designed to boost the economy. Equity and commodity markets had been trading close to their near-term highs in anticipation of better news, but once the minutes were released, investors were encouraged to lighten up on their long positions.
As the dollar rose, the Euro weakened substantially with traders confirming the weakness in the single-currency by pushing it through the recent bottom at 1.2267. With a downtrend clearly developed and well intact, Euro traders have now set their sights on the June 2010 bottom at 1.1876.
Besides the strength of the dollar and the Fed’s next move which could occur when it next meets on July 31 and August 1, traders should continue to monitor U.S. economic reports as these will give clues as to what data the Fed members are assessing when they have to decide on the next possible round of quantitative easing.
Additionally, Euro traders should continue to monitor interest rates in Spain and Italy. Although moves have been made to shore up the Euro Region’s ailing banking systems, bad news can shift investor sentiment quickly, leading to additional selling pressure.
The GBP/USD is also under pressure today because of the stronger Dollar. Unlike the U.S.central bank, the Bank of England increased its stimulus earlier in the month, triggering a sell-off in this Forex pair. Traders are following a simple strategy at this time. They are selling the currency linked to the latest round of QE.
When a central bank applies QE it weakens its currency because the action amounts to “flooding” the market with additional money. As long as the BoE remains more dovish than the Fed, continue to look for weakness. The GBP/USD is set up for more weakness over the near-term which makes the low of the year at 1.5233 the next likely downside target.
Commodities priced in U.S. Dollars are also trading weaker today. As the dollar rises, these commodities become more expensive to users, thereby, lowering demand. This is happening to August Gold and September Crude Oil this morning.
Recently, Gold traders have had a hard time determining whether the precious metal was a reserve currency or an investment. Because of the strength of the dollar today, traders are selling gold because of its reserve currency qualities.
August Gold is currently breaking through the support line of a long-term triangle chart pattern. This could lead to additional selling pressure if this support is taken out with conviction. Watch for a test of the last main bottom at $1547.60. Stops could be triggered under this level leading to a possible test of the bottom at $1532.10.
September Crude Oil continues to feel selling pressure. The combination of oversupply and the stronger dollar is encouraging traders to lighten up on their long positions. The main trend is up on the daily chart and speculators may be supporting this market in anticipation of problems regarding Iran and the Strait of Hormuz.
Crude Oil could continue to weaken until it reaches a retracement zone at $83.13 to $81.75. Since the main trend is up, investors may step in at this zone to support the market.
Today’s overall weakness in the Euro, British Pound and commodity markets is being triggered by disappoint in the Fed regarding additional stimulus. This has led to a strong rally in the U.S. Dollar. As long as the Greenback continues its uptrend, traders should look for downside pressure in the EUR/USD, GBP/USD and commodities priced in dollars.