Currency Markets Awaiting Bernanke Speech

08/25/2010 12:01 am EST

Focus: FOREX

The US dollar finished higher against most currencies early this week, driven by a weak outlook for the global economic recovery.

The EUR/USD fell further as sentiment shifted away from risky assets. Despite the light volume and low volatility, sellers dominated the market all day. The weak close has this market in a position to test a major 50% price level at 1.2605. A failure to hold this level means a break to 1.2433 is likely.

Without any major economic reports until late in the session and several large trading groups out of the markets until after Labor Day, volatility may be down throughout the week. On Thursday, Bernanke gives a speech at the central bankers’ gathering at Jackson Hole, WY. This speech has the potential to move the markets depending on what he says and what he doesn’t say.

After an early attempt to break out to the upside, the GBP/USD ran into sellers who quickly pushed this pair to the bear side of a pair of Gann angles. Fundamentally, traders are concerned that the new austerity measures will slow down the recovery.

At the close, the British Pound is trading on the bear side of an uptrending Gann angle at 1.5569 and on the bear side of a downtrending Gann angle at 1.5557. This price cluster was pierced early in the session, but the move did not attract any follow-through buying.

Although the Gann angles are indicating developing weakness, it looks as if acceleration to the downside is likely to start following a close under a minor .618 level at 1.5457. Once this area is penetrated, the charts indicate that the market can go into a freefall because the next major downside level is 1.5113.

The USD/JPY remains inside the main range of 84.73 to 86.37, but below the midpoint of this range at 85.55, indicating impending weakness. The fact that we’ve sat inside this range for six trading sessions also means to expect volatility. The only problem is that no one is sure which way the market will move, although traders appear to be leaning toward the short side.

Investors have been factoring in the possibility of an intervention by the Bank of Japan, but so far, no such decision has been forthcoming. This is creating the uncertainty in the market. This morning, the Japanese government said it would work with the BoJ, but this came as no surprise to veteran investors who truly believe the government has had its hand in just about every major policy decision. Nevertheless, investors lighten up bets calling for an intervention as flight-to-safety buying of the yen took over once again.

The Australian dollar gapped lower overnight due to political uncertainty stemming from unclear election results over the weekend and the possibility of a hung parliament. Weak shorts most likely lightened up their positions on the news. The lack of follow through to the downside triggered a short-covering rally into the mid-session, but this rally also failed before the market traded lower into the close.

Traders are a little confused as to which side of the market to take. Technically, this market could rally back to .9030, where it will most likely be sold. The charts also indicate that there is plenty of room to the downside, with a 50% level at .8644 a likely target.

In our opinion, the traders are waiting to see if a compromise can be reached before taking a side. This is how the UK elections were settled, which led to almost immediate stability in the government, triggering a long-term rally. Traders are hoping a similar solution will be reached in Australia.

By the Staff at
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