Falling Interest Rates Helping to Drive Euro Rally

The EUR/USD reached a seven-week high as investors shifted demand to risky assets on renewed hopes that the European Central Bank would soon begin buying Spanish and Italian bonds to contain the sovereign debt crisis. 

In a continuation of the move that began on July 24 when ECB President Mario Draghi pledged to do “whatever it takes” to preserve the Euro and following several false starts and retracements, the Euro was finally able to break through several levels of resistance to post a solid gain today. 

Key borrowing rates are falling across the Euro Zone on reports that the central bank was in the process of designing detailed plans outlining its desire to begin bond-buying in Spain and Italy. Today’s action is having the same effect as an intervention as traders are gaining confidence that the central bank will act soon. 

Over the weekend, the Euro was underpinned by news that the ECB would put a lid on Euro Zone debt yields. It weakened, however, afterGermany’s Bundesbank voiced concern against the purchase of government bonds by the ECB. Traders seem to be shrugging off these remarks today as evidenced by the surge in the Euro versus the U.S. Dollar. 

Investors are also driving up the Euro ahead of key meetings with Euro Zone leaders. At issue isGreece’s future in the Euro Zone and the ability of the organization to stabilize its currency. 

The GBP/USD is also finding support today on optimism that the Euro Zone members are finally taking serious steps toward stabilizing the region. Fresh buying as well as short-covering is helping to drive theSterlingthrough the June 20 top at 1.5777. Based on the late April to early June range of 1.6301 to 1.5268, the next upside target is a retracement zone at 1.5784 to 1.5906. 

Now that the British Pound has broken out to the upside against the U.S. Dollar, the old resistance levels at 1.5777 and 1.5784 could become new support. This would be an almost sure sign that long-term sentiment is shifting. 

October Crude Oil is reaffirming its solid uptrend with a rally to prices not seen since May. The weaker dollar is contributing the most to the rally while the potential for a military skirmish in theMiddle Eastis helping to underpin the market. 

In a delayed reaction to the breakout to the upside which occurred several weeks ago, December Gold is rallying once again. Today’s action took out several weeks worth of tops at $1629.70, $1633.30 and $1639.60. Stops and fresh buying is helping to drive the market higher. Standing in the way of further upside action is the June 6 top at $1646.40. The chart pattern suggests that the eventual upside target is $1668.15. The weaker Dollar is helping to drive Gold higher as well as perceptions of higher inflation. 

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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