A strong fundamental report drove the EUR USD higher on Thursday. Following three days of lower-lows, the Euro came back with a vengeance as the European Commission's gauge of economic sentiment posted stronger-than-expected results.
Shorts covered following the news as it somewhat diminished Wednesday's comments from a European Central Bank member calling for the possibility of an interest rate cut to below 1%. Shorts were pricing in a rate cut on expectations of a worsening Euro Zone economy. Although today's report still showed that consumer confidence was down, the improvement in the retail confidence index indicated that consumers are still willing to spend.
Technically, this market is at a critical juncture. Based on the longer-term charts, 1.4184 is still key 50% retracement resistance. Last week's high at 1.4050 has also been flagged as a main top on the swing chart because of the four day decline. A failure to penetrate this area will indicate that the selling is greater than the buying at the current price levels.
The action over the past few days indicates how sensitive this market is to news. The recent violent swings in the market have for the most part been triggered by speculation. With the next ECB meeting coming up on June 4, traders will begin to look for more solid information to use in order to determine the direction of the ECB committee members.
Upside momentum is slowing down in the GBP USD as buying has diminished near a key 50% retracement price at 1.6085. This price is critical to the structure of the current rally as it will dictate how much further this market could rally. If this market can establish support above 1.6085, then it has a great chance of continuing the rally to 1.6694.
Because of the size of the recent rally without any economic substance, traders have been reluctant to add to established positions at current levels. In addition, some traders do not seem too interested in initiating new positions at current levels until the market makes a correction.
Traders are also starting to become concerned about the strong surge in U.S. interest rates. Downside pressure could be building in the Pound on the thought that higher U.S. yields will attract foreign investors seeking a higher return. The problem is that higher yields could also raise concerns over the U.S. ability to fund its growing debt.
News that Japanese investors bought more foreign assets last month drove the USD JPY sharply higher on Thursday. Declining global tensions and signs that the global recession may be bottoming fueled Japanese investor demand for higher yielding assets. This move should be welcome news for the Bank of Japan which has been looking for lower Yen prices in order to stimulate the export market.
Technically, the main trend turned to up on the swing chart when the market broke through the swing top at 96.69. The buying pressure landed this market inside of a major retracement zone at 96.79 to 97.49. Now that the news is out and the market has reached this retracement zone, long-side gains may be limited to the upside. Watch for profit-taking to begin especially if this market rallies all the way to 97.49.
