Weak Spanish Auction Spurs Volatility in Euro

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Foreign currencies and commodity markets were trading higher early in the session on strong buying from Asia. Investors were still buying assets in anticipation of additional stimulus from key central banks, but they were a little cautious ahead of Spanish and French bond auctions that were to take place later in the day.

The EUR/USD accelerated to the upside overnight after taking out a downtrending resistance line at 1.2287. Based on the longer-term range of 1.2747 to 1.2162, some bullish traders thought this meant the Euro was well on its way to a test of a 50% level at 1.2454.

Later in the trading session all eyes were focused on the results of the latest Spanish auction. Spain was scheduled to auction 2 billion to 3 billion euros debt. France was due to offer 8 to 9 billion of its own bonds.

Forex markets turned volatile after the results of these auctions were released with volatility spiking. News of a weak Spanish auction fueled the volatility. Reports were circulating that the demand for the bonds was mostly domestic, adding to concerns that the international community views the country as risky. Traders now feel that Spain will have to make a formal request for additional aid and that either the ESM/EFSF or ECB will have to intervene.

The EUR/USD gave back all of its earlier gains as the currency pair plunged to 1.2257 after trading as high as 1.2324. Currently, the market is in a position to test short-term support at 1.2242.

The GBP/USD also participated in the overnight surge with the market trading up to 1.5720 before mounting an intra-day sell-off. The earlier rally fell short of the July 2 top at 1.5721, but the market is still trading in the vicinity of this price shortly before the mid-session and traders may try to take out this price later in the session. A trade through this level will turn the main trend to up on the daily chart and could trigger further short-covering or attract fresh buying all the way up to 1.54784 before meeting resistance.

August Gold futures continued to attract buyers, however, trading remained volatile. There is a slight bias to the upside developing which could drive this market through a resistance level at 1601.70. Volatility is likely to increase on a trade through this price. Uncertainty over the global economy and the possibility of a U.S. recession seem to be underpinning this market. Additionally, talk of additional stimulus is weakening the dollar, helping to support gold. Weak U.S. economic data could pressure the dollar which should help drive gold prices higher.

September Crude Oil continues to mount an impressive rally. The main trend is up and was confirmed yesterday. Technically, the market appears to be headed to a retracement level at $92.41. Traders should watch for profit-taking following the initial test of this level. Escalating tensions in the Middle East are the main reasons for the rapid price increase. The weaker dollar is also contributing somewhat to the increased demand.

The volatility in the EUR/USD is likely to continue as investors wrestle with sovereign debt and banking concerns, however, talk of additional U.S. stimulus may limit losses or even produce upside action. Gold is likely to react to the movement in the U.S. Dollar and concerns about the economy. Crude oil is in an uptrend that could continue to attract additional speculative buying especially if military movement is detected in the Middle East. 

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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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