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After a trading steady overnight in the wake of a volatile trading day on Thursday, the U.S. Dollar weakened and declined to a three-week low. Following the lead of European Central Bank President Mario Draghi, German Chancellor Angela Merkel and French President Francois Hollande on Friday endorsed Draghi’s comments from the previous day with the release of a joint statement saying they were determined to do everything possible to protect the Euro Zone.
This news helped push the Euro and British Pound higher, putting both currencies in a position to post weekly closing price reversals. This pattern typically leads to the start of a 2 to 3 week rally, but not necessarily a change in trend.
Shortly after the comments from Merkel and Hollande, the U.S. released its second quarter GDP report. This report showed that the U.S. economy grew a little more than expected, helping to underpin the dollar temporarily, but not enough to stop short traders from bailing out of their well-established Euro positions.
At first read, the effects of the GDP data on the markets was difficult to interpret since it only rose by 1.5%. This was slightly better than the 1.3% pre-report guesses, but still below the revised 2% rate in the first quarter. No matter how you look at it, the number still represents a slowdown which may be another reason for the weaker dollar.
Since June’s unemployment report, the speculators have been factoring in the possibility of another round of quantitative easing by the U.S. Federal Reserve. Today’s reported drop in GDP helps the cause since it is one of the key factors the Fed looks at when determining whether the economy has weakened enough to warrant additional aid.
Since the next key report is the August Non-Farm Payrolls Report on August 3, many feel that it is a little pre-mature to say with any certainty that the Fed’s Open Market Committee will reach a decision since it meets before the employment report. Some say the FOMC will make a move in late August; others are saying September is when the third round of bond purchases will begin.
Today’s so-so GDP report actually buys a little time for the Fed to get a little more clarity of the situation. With or without the Fed’s support, however, the comments from the ECB members and other high ranking officials has been enough to encourage short Euro traders to pare back their positions.
Friday’s weaker Greenback is also helping to boost commodities priced in dollars – namely September Crude Oil and December Gold.
Crude Oil looks as if it is ready to resume its uptrend after a small set-back. Besides the weaker Dollar, the market is being underpinned by speculators anticipating renewed tension in the Middle East. Traders don’t expect a surge in prices because of the oversupply issues, but steady speculative demand is expected to maintain the firm tone in the marketplace.
December Gold is also following through to the upside after a technical breakout earlier in the week. The strong tone in the marketplace reflects demand from traders who treat gold as a reserve currency. The strength in the gold is directly related to the weakness in the dollar. The market is expected to press a few old tops over the next few days. This could attract the attention of investment based buyers who are likely to chase the market higher over the near-term.
The story this week is the expected support for the Euro from the ECB. Comments from ECB officials helped put in a bottom and fuel the follow-through rally. Although much of the rally is related to short-covering, the more details that are revealed in the upcoming days about the ECB’s plan, the more confident speculators will become, helping to boost the Euro further.