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Oversold Condition, Weakening Dollar Fuels Gold Rally

James Hyerczyk from ForexHound.com at 02/02/10


A combination of oversold conditions and a weakening Dollar is helping to fuel a strong recovery rally in April Gold. After failing to attract fresh selling pressure following the break under the December bottom at $1076.50, this market formed a two-day support base before moving higher. Based on the short-term range of $1166.70 to $1074.40, traders should look for a retracement to $1120.50 to $1131.40. 

U.S. equity markets could not follow-through to the upside overnight after yesterday’s rally. This may be indicating the possibility of a rangebound day. Last night’s news that the Bank of Australia passed on an interest rate hike could put a little pressure on the markets today. Traders are trying to decide if risk is on or off. On the bullish side, thinning volume because of this Friday’s U.S. employment report could mean the way of least resistance is up.

The March E-mini S&P 500 closed above the 50% price at 1084.50 which should help trigger further upside movement. The charts indicate a rally to 1107.00 is likely over the near-term.

Greater demand for risk could lead to renewed pressure on Treasury futures. Fear had been driving investors into the safety of the March Treasury Bonds and March Treasury Notes, but global economic conditions have calmed enough to drive demand down. The bigger picture still indicates that March Bonds are finding resistance inside a major retracement zone at 118’24 to 119’24. A close under 118’24 will indicate weakness that could trigger the start of a break back to 116’06.

Yesterday’s upbeat U.S. manufacturing report, oversold markets and greater demand for risky assets is helping to boost the March Crude Oil. A new main range at 84.45 to 72.43 has been formed which could trigger a retracement to 78.44.

The U.S. Dollar is trading mixed against most major currencies after a volatile, two-sided overnight trade. Thinning trading conditions and position squaring ahead of this Friday’s U.S. Non-Farm Payrolls Report is having an influence on this week’s trading action.

The Reserve Bank of Australia announced overnight that interest rates would remain unchanged at 3.75%. It is being reported that this was surprise news, but the handwriting was on the wall a couple of week’s ago when China decided to begin tightening its monetary policy. This led to speculation the Australian economy would be threatened which I believe was a major influence on the RBA’s decision.  The RBA wants to see how recent events affect the economy before making its next decision.

The March Euro is trading better as pressures from the financial crisis in Greece seem to be fading. Investors expect to hear more upbeat news on Wednesday when the European Union releases its official opinion on Greece’s efforts to shore up its budget. Upside momentum could take this market back to the last main bottom at 1.4029. Key support remains 1.3800. This price represents a major 50% retracement level.

The March British Pound is trading lower as traders continue to express their concerns over a poor economy, growing fiscal deficit and the upcoming U.K. election. The overnight trade indicates buyers are still stepping in close to the late December bottom at 1.5832 which could mean a support base is being built.

The March Japanese Yen is trading mixed. Traders seem to be uncertain about which direction risk sentiment will take today. Overnight, U.S. equity markets are higher, which is an indication that demand for higher risk assets is increasing.  On the other hand, the move to leave interest rates unchanged by the Reserve Bank of Australia could stifle demand for higher yielding assets. These two events are causing choppy trade in the Japanese Yen market.

The rally in the Euro continues to take the pressure off the Swiss National Bank to intervene which is helping to strengthen the March Swiss Franc. Traders should continue to monitor the situation in Greece to see if it triggers another sharp break in the Euro. Look for renewed upside pressure on the Swiss Franc versus the Dollar if the Euro continues to strengthen. Based on current conditions, this pair may rally back to 9645 before finding resistance.

Firmer equities, gold, and crude oil are underpinning the March Canadian Dollar. Yesterday’s closing price reversal bottom was confirmed overnight and a new main bottom was formed at .9326. The chart indicates that a minimum 2 to 3 day retracement is likely with an upside target of .9553

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