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Weak U.S. Economic Data Fuels Euro Short-covering Rally

By:
James Hyerczyk
Updated: Aug 25, 2015, 01:00 UTC

The EUR/USD rallied sharply higher as weaker U.S. economic data triggered a massive short-covering rally, taking the Forex pair to its highest level since

Weak U.S. Economic Data Fuels Euro Short-covering Rally

The EUR/USD rallied sharply higher as weaker U.S. economic data triggered a massive short-covering rally, taking the Forex pair to its highest level since September 23. Contributing to the huge rally was the grossly oversold Euro and the extremely overbought U.S. Dollar. Today’s rally may be an indication that investors have shifted out of the dollar and back into the Euro.

EURUSD

The Euro rallied versus the dollar after the New York State Manufacturing Index came in at 6.17, well below the estimate of 20.50. The Producer Price Index also came in below expectations at 1.6% in September. Traders were looking for a reading of 1.8%.

Lower-than-expected U.S. Retail Sales also contributed to the weakness by posting a reading of -0.2%. Analysts had expected growth of 0.3%.

The GBP/USD only managed a small gain after posting a two-sided trade. The combination of the weak U.S. economic data with a surprisingly low reading on U.K. unemployment should’ve been bullish for the British Pound, but investors seemed reluctant to flip from the short to the long side.

Tuesday’s weak U.K. inflation data may still be exerting some pressure on the Sterling. The weak price action may be indicating that traders have moved an interest rate hike by the Bank of England well into 2015. Today, it was reported that the U.K. unemployment rate fell to 6% in September, its lowest level in six years. Traders were looking for a decline to 6.1%.

December Comex Gold surged after the U.S. Dollar weakened on the poor U.S. economic data. Most of the rally into $1250.30 was short-covering, but there was some aggressive buying by investors betting on a weaker U.S. economy.

The upside target for this current rally is $1253.80 to $1270.40. Despite the strong rally, the main trend is still down. This current action is taking out the hedge and commodity funds who are scrambling to get out because of the shift in the fundamentals.

Support for December Crude Oil continued to erode on concerns about oversupply and low demand. The excess supply is being produced by the U.S., Russia and Saudi Arabia. Today’s news about the weakening U.S. economy is likely to mean demand will remain low.

Tomorrow, the Energy Information Administration is scheduled to release its latest weekly supply and demand data. The report was postponed a day because of Monday’s government holiday. Traders are looking for an increase of 2.3 million barrels.

Look for more volatility in the EUR/USD since European Central Bank President Mario Draghi is scheduled to speak at 2:00 p.m. Eastern Time. The Fed also releases Beige Book data at that time. 

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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