Forex Markets Guided by Central Bank Activity; Nikkei 225 Rallying from 8205 Support

In Forex markets, the US Dollar denominated pairs stabilized overnight, with the USD holding on to most of its gains and the Euro, GBP and AUD continuing to trade near their recent lows. Trading volumes remained thin with the UK holiday keeping many investors on the sidelines but the general tone in markets remains cautious at best (strongly negative at worst), and this is only being propelled by economic data which showed that services PMI in Germany dropped to 51.8 for the month of May, and German Factory Orders dropping nearly 2 percent for the same period. Wider Retail Sales figures out of the Eurozone and these also showed declines (down by 1 percent).

Of course, recent weeks have shown that market attention is only focused on macro data for about half of the trading sessions but news headlines were generally scarce yesterday even with the latest conference call from the G7. This meeting’s main agenda was to discuss the debt crisis in the Eurozone but there were not major statement headlines to guide sentiment after the meeting. There was some speculation that Germany would be looking to pressure Spain to reverse its stance and acquiesce to new bailout loan requirements for austerity but for the most part, this did not materialize. The next main event risk for the Eurozone continues to be the elections in Greece, which are scheduled for June 17th.

For forex markets, the main driver came with the central bank meetings in Canada and Australia. The RBA acted to make its monetary policy more accomodative by lowering its base interest rate by 25 basis points but this activity was not matched by the central bank in Canada (where interest rates were held steady at 1 percent).

The Canadian policy statement, however, did maintain a dovish stance, suggesting that future rate reductions might be appropriate if we see any significant deterioration in economic figures. The result was positive for the Canadian Dollar, as some analysts had started to expect a rate reduction in Canada after the results of the meeting in Australia. Looking forward, we will have the quarterly GDP figures out of Australia, and these are expected to rise to 0.7 percent, from 0.4 percent previously but the next market mover will be the policy statement from the next European Central Bank meeting.

Technical Analysis:

The USD/CHF is caught in a very bullish wave with very little in the way of downside corrections being seen. Long positions can be taken on a retracement back into 0.9360, which is a historical level but is also where moving averages are likely to rest on approach. Long term momentum is clearly upward but we need to see some weakness first to improve risk to reward ratios.

The Nikkei 225 is attempting to bounce out of 8205, which is just ahead of critical long term support at 8095. If this bounce is able to continue, the first level of resistance will be seen at 8660, which is where some Fibonacci and historical levels match up. More significant levels are seen at 9000 which is where moving averages and Fibonacci levels come together. Current levels are acceptable for long entries.

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