European Bank Bailout Sparks Rally

U.S. Dollar Trading (USD) stock tested new lows and the Dollar new highs for most of the day until a dramatic reversal of sentiment at the end of the US session saw stocks soar and the dollar sold off. The news that sparked the rally was a combination of Bernanke talking up FED easing options and bank recapitalization talks in Europe. In US stocks, DJIA +153 points closing at 10808, S&P +24 points closing at 1123 and NASDAQ +68 points closing at 2404. Looking ahead, September ADP Employment forecast at 75k vs. 91k previously. Also, September ISM Services forecast at 52.9 vs. 53.3 previously.

The Euro (EUR) the Euro lifted from sub 1.3200 level to break above 1.3300 on the positive news flow regarding the European banks and progress on the Greek bailout. Concerns still remain but the heavily oversold currency was able to enjoy solid gains against most pairs. Looking ahead, August Retail Sales forecast at -0.3% vs. 0.2% m/m previously.

The Japanese Yen (JPY) EUR/JPY tested levels under Y101 in the Asian session on Tuesday keeping most pairs under pressure until the late US session rally. The sharp rally in US stocks sent the EUR/JPY and AUD/JPY soaring into the close up over 150 pips in both pairs. USD/JPY remained very contained in familiar levels between Y76.50 to Y77.

The Sterling (GBP) the GBP/USD was inspired from the bigger EUR/USD moves down in Europe before staging a solid rally into the close with stocks. EUR/GBP rallied for the first time in 4 days on the positive European banking capital news and could bounce further ahead of tomorrow’s BOE rate decision in which QE Asset purchases could be expanded by the UK central bank. Looking ahead, September Services PMI forecast at 50.5 vs. 51.1 previously.

The Australian Dollar (AUD) the Aussie was sold aggressively in the risk off environment breaking below 0.9500 and then 0.9400 with solid economic data providing little support. August Trade Balance surged to 3.1bn vs. 1.9bn forecast. The RBA also met and held at 4.75% as they took note of global investor turmoil and preferred to wait and see Q3 inflation figures before acting. Traders took this as neutral to dovish and sold the AUD/USD aggressively after the statement was released.