The U.S. Dollar suffered huge losses against most major currencies following overnight news regarding a strengthening global economy and weaker U.S. business conditions in July. Fed Chairman Bernanke added to the bearishness by painting a gloomier forecast for the economy.
Strength in the global manufacturing sector gave investors little reason to lock up lower yields, driving investors into higher yielding assets. The report also forced investors to question the strength of the U.S. recovery.
The key question remains, how long will investors continue to seek risk? At some point, as they have in the past, investors will turn risk averse, seeking protection in the lower yielding Dollar and Yen. With the U.S. Non-Farm Payrolls Report due on Friday, the current break in the Dollar may be investors piling on for an exhaustive break which might come to a screeching halt if the U.S. jobs number comes out weaker than expected. Right now the break in the Dollar appears to be too easy with no big stopper in the way.
The Euro surged to the upside as investors had little choice but to buy the European currency following strong PMI reports from across Europe. All of the news seems to be centering on developing strength in Europe and continued weakness in the U.S. Technically the Euro is on pace to test the late April main top at 1.3342.
The British Pound posted a huge gain ahead of the Bank of England policy meeting on August 5. Interest rates are expected to remain at historically low levels, but the BoE will have its first chance to address the economy since the implementation of new austerity measures. The primary concern for the central bank at this time will be whether the austerity measures and the upcoming tax increases will have a negative effect on the economy. The BoE also has to address its current monetary policy in the wake of the recent strength in the Second Quarter GDP and inflation.
The main trend is up in the British Pound. The next upside objective is the .618 retracement level at 1.5967. Traders should be aware that the type of chart pattern taking place often ends in a closing price reversal top.
Fed Chairman Bernanke did not help matters much for the Dollar on Monday as he reiterated his weak assessment for the economy particularly labor and the housing market.
The size of the current rally in the currencies has taken some traders by surprise. Only two months ago there were forecasts calling for a weak European economy because of sovereign debt issues and new financial austerity measures. In addition, the possibility of debt defaults threatened the very existence of the Euro. Many investors believed that Europe would slash itself back into a recession. This has not been the case however, as business and consumer confidence is up as well as manufacturing. It looks as if the whole Euro region has rallied around the ECB’s decision to shore up finances and provide aid when needed.
While the Dollar continues to get punished in moves we haven’t seen since late 2009, traders should be aware that the type of punishment the Greenback is enduring may come to an abrupt halt if the U.S. employment report on Friday reveals a ray of light for the economy. Investors should also be aware that a weaker than expected report may be the trigger that sends traders back to the safety of the Dollar. Either way it looks as if the Dollar is approaching a level which could produce a rapid turnaround. Technically, oversold conditions could limit short-selling. Fundamentally, a weakening U.S. economy may curtail the global recovery.
