EUR/USD Rallies after Draghi Drops Out of Jackson Hole

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After trading sideways-to-lower early in the trading session, the EUR/USD reversed course with an expanded range to the upside. The quick change in direction was attributed to the news that European Central Bank President Mario Draghi had cancelled plans to speak at the Federal Reserve’s Jackson Hole conference this weekend. This announcement shifted the focus on U.S. Federal Reserve Chairman Ben Bernanke’s speech at the same event which is supposed to hint at additional stimulus from the central bank. Speculators are banking on the Fed to buy more bonds to keep the economy on course and to ease stagnant financial conditions.

Traders are going to have to decide how much of this news is already baked into the recent bullish price action. Although Bernanke is not scheduled to address the Kansas City Federal Reserve’s annual Jackson Hole gathering of central bankers until August 31, speculation is already building that he will pepper his speech titled “Monetary Policy since the Crisis” with hints at renewed quantitative easing. The title of Bernanke’s speech makes it sound like a recap of the Fed’s past moves so some remain skeptical that it will contain any fresh forward looking information.

While Bernanke’s speech may continue to underpin the EUR/USD which is in a position to test last week’s high at 1.2589, news that borrowing costs dropped for both Italy and Spain may actually be the catalyst that lifts the market to that level today. Earlier in the session, it was reported that Italy sold 750 million Euros of inflation-indexed Treasury Bonds, while Spain sold to investors three- and six-month Treasury Bills. Both auctions continued the trend of lower interest rates which began in late July after ECB President Mario Draghi vowed to do “whatever it takes” to preserve the Euro.

Even if Bernanke doesn’t provide the jolt that investors are anticipating, the market will not eliminate the possibility of Fed action in September. This means that there should be a bullish undertone supporting the Euro versus the Dollar over the near-term. Additionally, traders remain optimistic that the ECB will eventually reveal a bond-buying plan of its own. This new plan, however, is expected to be contingent upon troubled nation’s initially tapping the European rescue fund before any funds will be distributed.

The GBP/USD remained under pressure on Tuesday for the fourth straight day as a weak economy continues to support speculation that the Bank of England will be forced to continue its aggressive asset-purchasing program. Last week’s breakout to the upside on the charts raised speculation that the central bank may refrain from additional stimulus, but the lack of follow-through to the upside was a strong indication that the currency pair was still being controlled by short-sellers. The daily chart suggests that 1.5740 to 1.5700 could be the next downside target zone.

Overbought conditions are pressuring December Gold today. Additionally, from a technical perspective, the market is not attracting any fresh buying interest at current price levels because it has reached an important 50% price level on the daily chart at $1669.48. Gold is often subject to the influences of both investment and reserve currency buying. Consequently, investors look for value so the drive into the key retracement zone may actually be encouraging investors to take profits.

October Crude Oil is trading steady today with speculators showing no real conviction even as Hurricane Isaac bears down on key oil production areas in the Gulf of Mexico. The trend is up and not actually being threatened, however, traders seem unwilling to chase the market higher despite a seemingly bullish fundamental event taking place. 

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About: FX Empire Analyst - James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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