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A rise in Spanish bond yields may have been too much for investors to handle going into the week-end, giving them an excuse to bailout of higher-risk currencies and assets. This triggered a break in the Euro, British Pound, Gold and Crude Oil. The sharp sell-off in all four key markets is further proof that investors are still more concerned about the European sovereign debt crisis than additional stimulus from central banks. The trading action suggests that traders may have finally realized that the rally was caused by speculation while the break was triggered by reality.
Traders dumped risky assets on Friday on the thought that without additional help from the European Central Bank, Spain’s economy is at risk. The rise in Spanish 10-year yields above 7% is also a clear warning to investors that the situation is close to going out of control. Finally, the ECB’s decision to declare marketable debt instruments by Greece ineligible as collateral increased fear amongst investors.
These are the three main reasons why investors pulled out of risky assets and into the safety of the U.S. Dollar and the Japanese Yen. The dollar rose sharply as speculative support triggered earlier this week on the thought of additional stimulus from the U.S. Federal Reserve disappeared.
With the fear of the Euro Zone’s economy weakening faster than the U.S. economy, investors decided to go with the main trend and renewed selling pressure in the Euro against the dollar. This trend is likely to extend into next week based on Friday’s downside momentum.
The EUR/USD is plunging today, taking out the previous low at 1.2162, and setting up the market for a potential move into the June 2010 bottom at 1.1876. The new main top drops from 1.2747 to 1.2324. A trade through this level will turn the main trend to up on the daily chart.
The GBP/USD is also selling off due to the strength in the U.S. Dollar and on the fear that financial problems in Europe will spread to the United Kingdom. The Sterling ran into resistance at 1.5652. Based on the short-term range of 1.5737 to 1.5392, traders should look for a break into 1.5564 over the near-term.
September Crude Oil is trading lower after testing a major 50% retracement level at $92.41. The subsequent sell-off is related to profit-taking related to the stronger dollar. Bullish speculative interest remains high because of issues in the Middle East that can flare up at any time. Speculators are likely to provide support on breaks because of the looming threat to supply.
August Gold is trading weaker but remains inside of a technical triangle chart pattern. The chart pattern suggests impending volatility, once the market breaks out of this pattern. The two key price levels to watch are $1599.70 and $1568.10. Although gold is down today because of the weaker dollar, there remains a slightly bullish tone because of economic uncertainty.