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Euro Rallies, Australian Dollar Down After Interest Rate Decision

The Euro rallied to a one-month high on the back of better than expected data while the Aussie dollar was down after the Reserve Bank of Australia held its base interest rate at the current level and appeared less hawkish than expected.

European retail sales were surprisingly stronger as were German factory orders. The euro was up on the day but a majority of the gains were booked prior to the release of the economic data. This leads one to believe that the euro buying was done on expectations of a combination of factors; potential rate increase that is expected to be signaled by ECB President Jean-Claude Trichet on Thursday as well as further steps towards a resolution to stave off a Greek default. The next resistance level for the EUR/USD comes in at the late April/early May lows at 1.4750. Support looks to be at 1.4550.

Sterling received a boost today after a modest rise in UK home prices over the month of May. Downside risks for UK economy exist as highlighted by an IMF report today that essentially backed the current policy measures of the Bank of England. Cable traded as high as 1.6470 before coming back down to 1.6415. Despite today’s modest gains pair is showing falling momentum on the technical and a break of 1.6285 would test the rising trend line off of May 2010 low.

The decision to hold rates steady by the RBA is not too surprising given the stickiness of global economic data, specifically from the US. While inflation pressures remain in Australia, traders and economists will be looking for core inflation numbers to reach the upper band which the RBA holds between 2-3%. Currently RBA Governor Glenn Stevens believes there may be time for a pause in Aussie rate increases with the next possible rate adjustment coming in August. Following the dovish statement the AUD/USD slid early this morning to trade as low as 1.0670 before trading back to 1.0690. Support for the pair rests at Friday’s low near 1.0600. In spite of the pause by the RBA the Australian dollar may have scope for further gains. A break of near-term resistance at 1.0770 could fuel gains to 1.0890.

US equities continue to slump having traded in the red the past 4 consecutive trading days with the S&P still up on the year by 2.7%. Traders are looking to Fed Chairman Ben Bernanke for verbal support but the risk is for a downgrade in the Fed’s economic assessment, perhaps increasing the negative sentiment that is currently behind the dollar’s decline.

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Russell Glaser

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.