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News that U.S.manufacturing shrank the fastest in more than three years in August is helping to drive traders into the safety of the dollar as trader sentiment shifted into “risk off” mode.
Last month’s weakness was the third in a row of contraction in manufacturing according to the Institute for Supply Management survey. The ISM’s index of national factory activity fell to 49.6 in August from 49.8 in July.
Early in the trading session, the Euro rose as Spanish and Italian yield curves steepened sharply on reports that ECB President Mario Draghi told a European Parliament committee that the central bank could buy bonds. This was considered a positive event because of prior concerns that the ECB was violating a mandate that prevented the purchase of bonds with maturities as long as three years.
The Euro turned positive against the Dollar later in the session when the weak U.S.economic data was released. Expectations are that Draghi is going to provide more details of his bond purchasing plan on Thursday after the ECB meets to decide monetary policy.
The U.S. Dollar is trading higher against the British Pound. A flight to safety rally is helping to boost the Greenback. There are also concerns that the Bank of England is going to implement another round of quantitative easing in the form of additional bond purchases. Printing more currency tends to have a negative effect on the currency.
The news that U.S.manufacturing shrank last month is not good for the crude oil market. With supply relatively high, a drop in demand could encourage more selling. Additionally, the U.S. Dollar is being driven higher which is making commodities priced in dollars more expensive. This is likely to also pressure demand.
Despite the stronger dollar, December Gold is trading higher. This means that investors are driving the market. Upside momentum is picking up as the market penetrates key retracement zones. Following several months of accumulation, it now looks as if speculators are willing to chase this market higher.