Volatility Dominates Forex Markets

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The Euro weakened overnight ahead of Fed Chairman Bernanke’s talk before U.S. lawmakers this morning after German Chancellor Angela Merkel rattled investors with comments about the future of the Euro Zone. “We have not yet shaped the European project so that we can be sure that everything will turn out well, we still have work to do,” she said. Later she added that she was “optimistic that we will succeed.”

Traders will be looking for any hint of when and how the Fed will apply its next round of quantitative easing when Fed Chairman Bernanke delivers his second day of testimony in Washington. Bernanke painted a bleak outlook for the economy on Tuesday without specifically mentioning the need for quantitative easing. His comments did open the door for additional QE but they lacked any specific details, triggering the start of a volatile trading session.

Most traders agree that additional QE will be bearish for the U.S. Dollar while triggering greater demand for the foreign currencies, gold and equities.

The EUR/USD tested resistance this morning at 1.2307 before selling off from a high of 1.2306. This price fell short of the high for the week at 1.2316. Based on the short-term range of 1.2162 to 1.2316, a potential 50% support price level has been created at 1.2239. Today’s low is 1.2254. This price will be tested if downside momentum continues.  On the upside, a breakout above 1.2307 will put the Euro in a position to test a major retracement level at 1.2454 over the near-term.

The GBP/USD is mounting a slight comeback after early session weakness. Today’s range is 1.5668 to 1.5581. Downtrending resistance comes in at 1.5731 while support is at 1.5552. The market is currently trading inside of this range with a slight bias to the upside based on the trading activity earlier in the week. Bullish traders should watch the July 2 top at 1.5721. A trade through this price will turn the main trend to up on the daily chart.

Fundamentally, the British Sterling fell against most major currencies this morning after the Bank of England minutes showed that some monetary policymakers had argued for a larger, 75 billion pound increase in the central bank’s asset-purchase program. Further selling pressure ensued after it was reported that the BoE may consider an interest rate cut if the current stimulus package doesn’t generate enough growth in the economy.

September Crude Oil reaffirmed its uptrend on the daily chart with the trade through the July 5 top at $89.33 today. There was very little follow-through on the move, but if upside momentum picks up, crude oil could test a major 50% price level at $92.41 over the near-term.

Besides speculation of additional QE measures by the Fed, crude oil is being underpinned by this week’s inventory report that showed crude oil stocks dropped by 0.809M according to the EIA. The market consensus was for a loss of 1.150M.

December Gold has had a volatile morning. Currently, the market is mounting a strong comeback after plunging over $20. This market is still trading inside of triangle chart pattern that indicates impending volatility. A move through $1610.47 should trigger an acceleration to the upside while a break through $1544.48 will negate the potentially bullish chart pattern.

Bullish gold traders are banking on additional stimulus measures from the U.S. Federal Reserve to drive down the U.S. Dollar and increase gold’s value as a reserve currency. Additionally, talk of a recession in 2013 could drive up gold as a safe haven against economic uncertainty.

Traders should look for a volatile trading session as comments from Bernanke are released throughout the day. 

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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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