Dollar Sinks As Optimism Returns

The U.S stock market jumped higher during yesterday's session, backed by the financial and tech sector. The news event that took center stage was the statement from U.S officials, allowing several financial companies to repay their TARP money. A few of the banks include J.P Morgan, Goldman Sachs Group and American Express. On one hand, the companies are eager to give back funding, reducing the government's holdings in those companies while giving share holders more control. On the other hand, economists and IMF officials are still pondering whether the payback is a good thing, especially as the U.S financial system is still far from showing a healthy structure.

The financial sector continued to cling on to recent gains, closing yesterday's session with a mild profit of 0.73%. Even though volume has dramatically decreased over the last couple of weeks, financials are still trading within their recent trend. One should observe the 200 moving average as it could continue to act as resistance level.

Dollar's strength was limited

On the Forex market the Dollar index dropped after forming a doji like candlestick on Monday. The index dropped below 80 points, climbing back into its recent trend. The move was widely expected; especially as the risk for appetite has flip sided over the last couple of months, sending carry trades and other high yielders flying.

On individual pairs, the Euro/Dollar and the Pound/Dollar both presented a reversal, climbing higher, while the AUD/USD climbed higher after forming support on Fibonacci level 38.2%. Over in England, political news was quickly brushed aside Wednesday morning as further financial problems surfaced. According to Sky news, Lloyds banking group will lay-off an additional 1500 employees that are located in approximately 160 branches across England. Despite negative headline, the GBP/USD continued to gain strength early morning backed by fading political problems and improving housing data. As we recall Gordon Brown managed to survive the labor party meeting the other day and maintain his status. Even though the political saga is far from over, investors are now looking past the problems, taking advantage of the undervalued pound.

GBP/JPY setup

Even though indicators are pointing to overbought conditions the price pattern is now trading around resistance. Should the Pound receive further strength and break the $160.80 level, bullish positions could be an option. One must note that a break will depend on the Pound's overall momentum.

Economic Data to Watch Out For

A wave of data will hit the boards today, events that could spark movement on the various currency pairs and stock indices. Volatility should pick up dramatically during the U.S session as the Beige book is scheduled to be released, showing the health of 12 Federal Reserve districts. The data will be scrutinized by traders and investors alike, especially as they will be looking to the report to confirm recent price action that was based on assumptions that the U.S economy is finding a bottom. Other Data includes:

· Crude oil inventories from the U.S

· Housing Price index from Canada

· Interest rate decision for New-Zealand

· Unemployment data from Australia

The American Dollar renewed its fall against all major currencies yesterday after stock market performance, and rising oil prices enhanced investors demand for risk.

When investors are becoming more optimistic about the future condition of the global economy, they feel less need to hold the dollar, resorting to more high yielding currencies such as the Australian and New Zealand dollars, currencies which clearly became flooded with demand recently.

Trading EURUSD was quite a bumpy ride the last few trading days, the pair was topping last week around 1.4333 , then reversed in the beginning of this week to bottom around 1.3804. Since yesterday however, the revived optimism has pushed the pair above its 1.4 psychological resistance once again.

This morning EURUSD is trading a bit under its next resistance 1.4104, with a clear break above probably sending us to meet the higher ends of 1.41 in the coming days. However, a failure to move higher than 1.4 - 1.41 till the end of the week might signal uptrend momentum is demising.

Z.Georgi