EUR/USD Rallies on ECB Rate Cut Speculation

The EUR/USD traded higher on Monday as uncertainty over whether the European Central Bank would cut its benchmark interest rate at its next policy meeting this week crept into the market. The thought of the ECB refraining once again from a rate cut has encouraged a few shorts to cover their speculative positions, driving up the Forex pair from 1.2954 to 1.3111 this morning.

Also helping to underpin the Euro was Italy’s pledge to form a new government. Early in the session, increased demand for Italian bonds helped drive support the single-currency after center-left politician Enrico Letta took over as prime minister.

Rumors that hedge funds are buying the Euro also contributed to today’s short-covering rally. Overall, however, the main concern for traders is the direction of the U.S. Dollar and the impact of the Fed’s monetary policy decision on Wednesday. The recent weak U.S. data suggests the Euro could hold on to gains if it continues to pressure the dollar.

The GBP/USD traded higher on Monday for the fourth straight day. Last week’s news that the U.K. economy was improving was the catalyst behind the initial rally from 1.5196, but the U.S. Dollar’s recent weakness has helped drive the Sterling higher the past few days.

News that the U.K. economy expanded, encouraged shorts anticipating additional stimulus from the Bank of England to cover their positions, bringing an end to the break from 1.5411 on April 11. Based on the recent stronger-than-expected GDP data, traders are now anticipating the central bank to refrain from additional stimulus once again.

June gold traded higher, but upside momentum appears to be slowing despite the weaker U.S. Dollar. Technical factors are most likely contributing to the slowdown. Since forming the range between $1590.10 and $1321.50, value-seekers have helped drive gold into a retracement zone at $1455.80 to $1487.49. A break back under the 50% level at $1455.80 could trigger the start of a new-term correction while a sustained move through the Fibonacci level at $1487.49 is likely to trigger additional short-covering.

If the major stock indices can resume their rally then gold may feel some pressure as investors are likely to shift out of gold and back into the higher yielding and more liquid equity markets.

Despite indications of a slowing U.S. economy, June crude oil traded higher on Monday. Upside momentum has slowed since the market entered a technical retracement zone at $91.98 to $93.41. A sustained move over the Fibonacci level at $93.41 could trigger more buy stops while a break under the 50% price at $91.98 would be a sign of weakness.

The weaker dollar is helping to boost crude oil prices as foreign investors seek value. In addition, a drop in gasoline stocks reported last week is helping to drive up prices as investors factor in the possibility of increased demand during the late spring/summer driving months.