Current Rally Against The US Dollar Is Being Driven By Sentiment Rather Than Real Numbers

The U.S. Dollar finished the day mixed as investors took profits after the recent run-up. The Dollar weakened on the initial news regarding the GM bankruptcy filing but appeared to strengthen as analysts began to decipher the filing. President Obama seemed to calm the market by offering his approval of the plan.

For the most part, this recent surge in the major currency pairs has been sentiment-driven rather than based on solid economic facts. Investors have been searching for good news everywhere and seem to find it in each report that has been released. Traders have been acting as if a bottom is in rather than just beginning. Most of the majors have reached 50% retracement points of their declines from last year’s tops to this year’s bottoms. These retracements could prove to be important resistance points if the markets do not keep getting good news to feed the rally.

The GBP/USD received good news on Monday as reports showed that U.K. manufacturing and housing sectors showed signs of improvement. Traders seem to be ignoring the huge U.K. deficit as long as economic reports have been rosy. Traders will once again highlight the growing deficit if a negative report surfaces, but for now this pair appears to be safe. Now that this market has regained a major 50% price at 1.6085, the next upside target is 1.6694.

Investors sold the EUR/USD after this pair failed to hold over a major 50% price at 1.4184. The selling pressure came close to triggering a daily closing price reversal down which would have been a solid signal that this market was ready to break. Despite not making a reversal top, this pair still appears to be weak and could correct back to 1.4019 to 1.3988.

The lack of positive economic news from the Euro Zone is making investors hesitant about buying at current levels. On June 4th the European Central Bank meets to set current economic policy. Traders are nervous that the ECB will take its key interest rate under 1%. Unless there is a positive surprise in the economic reports prior to the meeting, there is a strong possibility of a cut. In addition, traders are nervous that the ECB may up the amount of quantitative analysis it intends to apply to the market. Finally, one other concern among investors is the rapid rise in the Euro. Some feel the ECB will take action to stem the rise. Traders feel that exports may suffer if the value of the Euro gets too high.

The USD/JPY rebounded after a couple of days of hard selling pressure. The buying came in strong on Monday in front of the recent main bottom at 93.84. The main trend is up and a move through 97.23 will reaffirm the uptrend. Traders are buying the USD/JPY because Japanese investors are seeking higher yields outside of the country.

The USD/CHF posted a daily closing price reversal bottom following a test of a major Fibonacci retracement level at 1.0660. A rally through 1.0723 will confirm the reversal bottom at 1.0617. Based on the oversold condition of this market, it appears a retracement to 1.0941 is possible over the short-run.

The move today by the U.S. Dollar versus the Swiss Franc is a sign that this market is overextended to the downside and that investors do not see any value adding to short positions at current levels.

Today’s action looks as if the Dollar bears are ready to take a break since most pairs have reached objectives. There are also concerns that the current rally against the Dollar is being driven by sentiment rather than real numbers. Look for follow-through strength in the Dollar tomorrow. Trading may also slow down the rest of this week until Friday’s U.S. unemployment report.