The foreign exchange market experienced another day of strong volatility as the British Pound shrugged off bad employment figures and dovish talk from Bank of England Governor Mervyn King and surged against both the U.S. Dollar and the Japanese Yen.

Yesterday, the current move against the U.S. Dollar was initiated by a report released by Goldman Sachs that outlined the possibility that the Federal Reserve may have to print upwards of $1 trillion in order to stimulate a very weak and anemic U.S. economic recovery.  That report caused the market to sell the Dollar with fury as both the euro and the pound gained aggressively versus the dollar.  It is a bit surprising that the market decided to sell Dollars so aggressively based on a report from one analyst, even if the analyst was Goldman Sachs.  Furthermore, Goldman did not say that the Federal Reserve would do this for sure; instead, they simply said it was a possibility.  Thus, many market participants are wondering where the fundamental backing for this sudden run against the Dollar is.

The Chinese Yuan

China is under severe pressure at the moment to let the yuan strengthen further.  Many economists and analysts believe that China has a severely unfair trade advantage by keeping the yuan at artificially low levels.  If the yuan does strengthen further in the near-term, that will result in a cheaper U.S. Dollar because the yuan has been pegged to the Dollar for several years.  Basically, this means that China has kept the yuan artificially low by purchasing huge amounts of U.S. Dollars over the last several years.  In order for China to let the yuan float higher, it will need to sell U.S. Dollars.

There are many political reasons why China does not want to do this, but the reality is that enough of the developed world is bearing down on them, that they may fold under the political pressure and agree to let the yuan float even higher.  This would most likely result in a lower U.S. Dollar.  Thus, investors are keeping an eye on developments in China to see when this move may happen, and mere speculation of the possibility is one reason the dollar is weakening at the moment.

British Pound

We stated in yesterday's report that the economic data out of the U.K. Wednesday morning would be vitally important in determining whether the pound would be able to maintain its strong breakout from Tuesday's New York session.

This morning Claimant Count Change came out at 2.3k versus the expected -4.1k.  This negative employment number means the U.K. economy is still facing major obstacles in its current economic recovery as employment remains a grave concern.  This negative number caused the GBP/USD to fall sharply during the initial release of the figure, but it had recovered all of its losses and began pushing higher within 30 minutes.

At 6:30 am this morning, BOE Governor Mervyn King spoke at the Trades Union Congress in Manchester, and he did not discuss the possibility of hiking interest rates at all.  With inflation remaining a constant threat in the U.K., market participants were waiting to see if King would hint toward a possible rate hike in any way, but instead he chose to focus on the deteriorating economic conditions in the U.K.  This actually did not serve to weaken the pound at all; instead, the pound began its strong New York session ascent for a 2nd consecutive day.  The pound then broke out aggressively around 10:15 am est as it broke yesterday's HI at 1.5586 before getting stuck underneath the 1.5645 area, which is a major area of overhead resistance.
 Note: Past performance is not indicative of future results.
You can see in the chart above that the pound has hit the 50% fib to the pip and fallen back.  Since there is not major fundamental backing fueling this pound breakout, traders may be hesitant to bid prices much higher than the 1.5645 area.  We may see the pound come off these HI's and retest support down at the 1.5565 area before regaining strength to make another push at the 1.5645 area.  A sustained break and close on the Daily Chart above 1.5700 would open the door for much higher levels on the GBP/USD.

EURO

Wednesday's London trading session was rather quiet for the euro. The euro never found the strength that the pound found today; instead, it continued to consolidate near its HI's of Tuesday's trading session.
 Note: Past performance is not indicative of future results.
As you can see on the chart above, the EUR/USD did try to make a run at the HI of yesterday during the NY trading session Wednesday morning, but it failed.  The 1st green box to the left is Tuesday's HI and the 2nd green box to the right is today's HI.  Now that we have this double-top technical pattern in place, the EUR/USD may be facing a bit of downward pressure. 

The EUR/USD is moving in tight consolidation between the 38% retracement of yesterday's move, which is in the 1.2950 area and the HI's in the 1.3030 area.  If price can break below 1.2950 with conviction, we should see strong support in the 1.2910 area.  This area will have huge buying interest, as it is the former top side of the range that acted as resistance since early August.  Traders who missed the breakout on the EUR/USD but are bullish on the pair, will look to be getting into positions around that 1.2910 area.

Thursday's Outlook

The economic calendar is quite full on Thursday with Retail Sales due out in the U.K. and PPI, Unemployment Claims, TIC Long-Term Purchases, and Philly Fed Manufacturing Index all due out in the U.S.  This heavy flow of economic data should help give traders clearer perspective concerning the current weakness in the U.S. Dollar.  If the Retail Sales figures in the U.K. come out positive, and the data in the U.S. disappoints to the downside, we could see further gains for the pound and the euro versus the dollar.