Euro Breaks Out Of Range on Global Risk Appetite
Wed, Sep 1, 10:21 AM ET, by ForexTraders.com
After nearly 2 weeks of trading within a tight 150 pip range, the euro broke upside resistance at 1.2780 during the London session early Wednesday morning. The euro actually broke through 2 key swing HI's on the hourly chart as it broke to the upside, so we could see further euro gains in the coming days.
In this chart, you can see the two clear swing HI's in the green-shaded boxes that the euro broke above in order to post new HI's this morning. Then, the euro continued to push higher in early New York trading as buyers bid EUR/USD up to the 1.2850 area. The euro will face heavy resistance in the 1.2900 area and should see sellers protect the area initially. If the euro moves higher during the NY trading session and pressures the 2900 level, there may be very strong selling interest today. The euro has already moved beyond its daily range at the start of the NY session, and when a currency pair is overbought as the euro is today, it oftentimes has strong difficulty breaking through key areas of support and resistance.
The push from 1.2800 to 1.2850 during early NY trading was due to the ADP Employment figure that came out at 8:15 est. The number was a big disappointment as it posted at -10k versus the expected figure of +15k. This means there was a loss of 10,000 jobs instead of the expected gain of 15,000. The focus in the United States is heavily on employment figures. The very poor labor market conditions are weighing on economic recovery and this number today is yet another confirmation that the U.S. economy is really struggling. Economists and investors know this, but each disappointing figure just makes it worse.
The ADP Employment number can also be a leading indicator for Friday's Non-Farm Payroll, and if it is in this case, we could see a very strong bout of risk aversion enter the market. The question is which direction will the Dollar go? Case for Dollar WeaknessGenerally, when U.S. data comes out very poor, the Dollar tends to get strong as investors rush into the safety of the U.S. Dollar. Then, as U.S. data comes out good, investors tend to sell the Dollar as they rush out of the low-yielding Dollar and into higher-yielding currencies. However, during the last 3 months we have seen this correlation break down. During the months of June and July, market participants aggressively sold the U.S. Dollar as key economic data came out negative. Let's break down why this has been happening.
The current global recovery is facing a major wall of resistance as the U.K., U.S., China, and the EuroZone are all facing uncertain financial conditions. The U.S., however, seems to be facing the most difficulty at the moment. China is still moving forward in very strong fashion, they are simply going through a period of slower than usual growth. The same seems to be true in the U.K. and the EuroZone. The U.S. is in a different place, though. In the U.S., the threat is not only an economic slow-down, but an actual economic contraction. Key economic indicators seem to be pointing to a possible double-dip recession in the United States, and some economists are beginning to predict that the Q3 GDP may read negative in the U.S. Two consecutive quarters of negative GDP constitutes a recession. Since the U.S. is really facing this potential threat alone, investors are beginning to raise the possibility of selling the U.S. Dollar as U.S. news continues to come out negative.
If this phenomenon continues, it could serve disastrous for the U.S. Dollar. Investors have long been not interested in holding the Dollar during good times because of the incredibly low yield offered. However, the market has tended to hold the Dollar during bad times since investors want the safety of their capital above everything else. What will happen if the U.S. heads into economic contraction and other developed nations do not? How will this affect the U.S. Dollar?
Most likely the U.S. Dollar will weaken significantly because there will be no reason for investors to hold it. This could be the beginning of the great U.S. Dollar bear run that many economists and experts have been predicting for some time. We have seen hints of this phenomenon unfold during June and July and we have seen it again today. Case for Dollar StrengthUnfortunately, it seems that the only case for real U.S. Dollar strength during the 2nd half of 2010 and into 2011 is if the global economy slows significantly. Currently, investors are unsure of the economic outlook. There are many mixed signals in the market, and the economic outlook is probably more uncertain right now than in recent history. At the beginning of The Great Recession, at least investors knew we were in trouble. Now, no one is sure. Are we going to rebound and move up from here, or is there still significant downside risk? Of course, there is downside risk, but no one knows how far we will fall, if we will fall, or when we will fall if we do. The outlook is very uncertain.
As long as the global outlook remains uncertain, the U.S. Dollar should find strength as investors are unwilling to completely depart from the safety of U.S. Treasuries. However, if the global economy does deteriorate during the next month to several months, and it becomes clear that other countries are in the same degree of trouble as the U.S., then the Dollar should remain in bullish mode.
Lately, we have seen poor U.S. news come out, the market sells the Dollar aggressively, and then after 15-30 minutes of Dollar selling, the market reverses course and begins buying the Dollar only to retrace all the Dollar weakness and actually move into further Dollar strength within several hours. This is what is playing out during the NY trading session at the moment, as investors remain very uncertain of the economic outlook.
SDI Glossary: "GDP" Definition
SDI Glossary: "Recession" Definition
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