USD on the Defensive

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The USD opens this week on the defensive as traders show concern that the US economy is not growing as much as had been expected. On Friday, it was announced that the US economy grew at a 2.5% annual rate in the first quarter. Estimates by economists were looking for a 3% gain. Traders are now expecting no changes in policy from the FED when they meet later this week.

Apparently the end of the Italian political stalemate where Prime Minister Enrico Letta was sworn in yesterday, ending two months of political stalemate was enough to push the EUR higher in overnight trading. Letta’s government could be installed today. The new Italian government has PM Letta’s party forming an alliance with Berlusconi’s PDL party.

The EUR jumped to a high of 1.3100 right before the European opening, before backing off towards the 1.3080 area. Technically, the 1.3125 resistance level is the one that traders are watching. A failure at that level would see the EUR slide back towards the support area at 1.3000.

In other currency news, the move towards 100.00 in USD/JPY seems to have ran its course without making it to that psychological level. The selling pressure that had been seen in JPY seems to have abated after Friday’s US GDP data and a very uneventful Bank of Japan meeting. USD/JPY is trading in the 97.60 area and analysts are now looking at a test of the 96.00 level in the near term.

The commodity currencies, AUD and CAD remain firm this morning as precious metals and oils have held their levels from late last week. USD/CAD is looking to test support at the 1.0130 level and a break there could bring us to 1.0100 sooner than expected. AUD has tested resistance at 1.0340 while a break there could see a move towards 1.0400.

As we move into this week, the FED and ECB meetings will certainly dominate traders thoughts, but the non-farm payroll number will certainly have something to do with the direction of the USD moving forward. Traders have moved away from the USD. But, as we all know traders affections for currencies are fickle and can change on a moment’s notice.

Personally, I am somewhat surprised that the Italian government situation has had as much of a reaction on the EUR as it had, as well as the negative feeling on the USD regarding the GDP number. I would have thought an economy growing at 2.5% was better than an economy (Eurozone) that was still in recession. But that’s what makes the foreign exchange markets so interesting.

Further reading: Advanced GDP?

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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