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It’s a risk-on day today in the financial markets with higher-risk assets soaring along with the Euro. The single-currency is surging after European Central Bank President Mario Draghi vowed that the central bank would do everything in its power to support the Euro.
Early in the trading session, Draghi said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.” Speaking at a conference in London, he further added “Believe me it will be enough.”
Based on the drop in bond yields in Spain and Italy, it looks as if the ECB is poised to resume purchases of bonds of these struggling nations. Moving forward, the key will be determining what Draghi means by “mandate”. Although the shorts-covered on the initial news sending the EUR/USD sharply higher, the fundamentals remain overwhelmingly bearish, meaning that investors will be looking for some clarification of his comment at a later date.
Technically, the EUR/USD turned its main trend up on the daily chart when it crossed 1.2324, but the move did not attract much buying attention beyond that as it stalled at 1.2326. If it can pick-up some additional upside momentum then it may continue up until it reaches a key retracement level at 1.2394.
Draghi’s optimistic views are also sent the GBP/USD sharply higher in a relief rally. Like the Euro, much of this rally is being triggered by short-covering. Latest reports show the market dominated by short positions which made it ripe for a squeeze. Based on the size of the move it certainly looks as if short traders were spooked by the Draghi comments.
The key level to watch is 1.5737. A trade through this level will change the main trend to up on the daily chart and could trigger an acceleration to the upside if shorts continue to cover on the news or if new investors decide to buy strength.
The sharp rise in the Euro is pressuring the U.S. Dollar, sending December Gold sharply higher. When the dollar weakens, the tendency is for commodities priced in dollars to fall. On Wednesday, gold broke out of a long-term technical pattern, triggering a strong short-covering rally. Today may be more of the same, but additional buying pressure may be present based on the market’s follow-through rally.
Technically, December Gold may face resistance at $1630.10, $1639.60 and $1646.40. Moves through these levels may trigger stops and additional short-covering with a move to $1668.15 the main objective of the rally.
September Crude Oil turned the corner on Wednesday at $86.04 and is receiving some support today. Although the dollar is trading lower, the weak U.S. economy and the abundance of supply may be holding back its advance. The main trend is up, but the momentum isn’t there today to trigger another breakout. Besides the weaker dollar, the possibility of a conflict in the Middle East continues to underpin the market.
Today’s surge in demand for higher risk assets is driving the markets higher today while pressuring the dollar. Although the rallies are impressive, they are most likely strong short-covering moves. In order to sustain the rallies, solid support bases must be built and concrete agreements have to take place before the Euro will actually become an attractive investment once again.