It’s amazing how the lack of any progress creates progress in and of itself. USD fundamental data remained mixed as better than expected Unemployment Claims, Home Sales and CB Consumer Confidence data were overshadowed by disappointing GDP figures and the debt crises itself.  The EUR/USD had a brief rally earlier in the week but gave back all of its gains to settle at 1.43971 just 31 pips removed from where it started. With the US on the brink of one of its worst economic blemishes to date the euro remained flat as investors seemed unable to determine the lesser of two evils. This occurred despite the strong technical inclinations for a USD rally.

The mixed messages suggest traders are truly undecided on the direction of the pair and have unsavory feelings towards both. In the event an amicable resolution is reached over the weekend or early next week on US debt ceiling, traders may be in for a long downward spiral. If such an agreement is viewed as insufficient or fails to matriculate entirely, we may be gearing up for an epic run on the dollar as it is already facing pressure across just about every currency.

This notion however is not limited to EUR/USD. This week saw record lows for the dollar against the loonie, kiwi, franc and yen with no end to the rally in sight. The loonie and franc in particular are beginning to come into their own as reserve currencies rallying in lieu of the dollar as the week brought with it somber economic data from nations across the globe.  The golden rule of thumb, what goes up must come down, will sooner or later come to fruition. How high it may go is anyone’s guess although the next few days should be telling. If in fact an agreement is reached that satisfies investors concerns and wards off a looming credit downgrade, we may see a massive correction as investors across the board scramble to take profits before Isaac Newton’s infamous rule sets in. If an agreement is not reached, or a downgrade occurs nonetheless, today’s highs may become tomorrow’s levels of support for a very long time to come.

What do the European debt crises, the US debt crises and the weather in New York have in common? Lots of heat and no end in sight. Interestingly enough that’s not exactly where the similarities end.  That notion alone probably has Alexander Hamilton churning in his grave.

Earlier this week president Barack Obama held “secret” talks with congressional GOP leaders to try and hammer out an agreement to raise the debt ceiling in exchange for certain austerity measures. The not so secret talks seem to have led to a not so surprising lack of compromise. In fact, as certain states and the Fed begin taking precautionary steps to prepare for default one may begin to wonder if that is actually where we may be headed. GOP house members attempted to pass a bill Friday requiring $5.8 trillion in cuts to lift the debt ceiling. That’s only $4.3 trillion shy of what the democratic leadership proposed! If one doesn’t find the above sarcasm amusing, perhaps the notion of US politicians setting aside their partisan differences for the common good of their populace and the economy will bring about some smiles. After all, it’s the economy stupid. With presidential elections just around the corner traders ought to really wonder who the real dummies are. Those who believe that when push comes to shove, an agreement will be hammered out to avoid potentially irreparable damage to the US and its economy or perhaps those who seem to think the GOP actually has no interest in coming to an amicable agreement and would actually like to see the US economy conveniently burn right before we head into an election year. Then again, what if an agreement is reached? Will the US trade deficit suddenly decrease? Will its economy suddenly shake off the lethargy of the past few months and surge? Will the US suddenly take a look at its spending across the board and learn to live within its means? Or perhaps will yet another band-aid be applied and the prospect of default merely delayed till we reach the new limit.

On the other side of the Atlantic, a very different but oddly similar story seems to be unfolding. The Euro surged against the dollar earlier this week as debt fears were eased by notes leaked from the EU summit suggesting rates on any new loans to Greece will have a rate of only 3.5% and that the loans already issued by the European Financial Stability Facility (EFSF) will have their terms doubled, from 7.5 years to 15 years. It sure sounds like EU is working towards a solution to help prop up their failing brethren.  A European monitory fund seems to be on the brink of creation – but wait! They already had that. In fact the only thing that really seemed to come out of the leaked notes is a change in how the currently available funds will be disbursed. That is to say, the actual amount of capital available to prop fledgling economies has not changed but rather the terms by which that money can be distributed.  To extrapolate on its consequences further, it seems that the EU is positioning itself not to prevent the default of its troubled members but merely to prepare itself for if and when it does happen. The subsequent surge in optimism should really help put the desperation of traders in perspective as markets appear ready to surge on any sign of stability.

Traders should take the fickleness of the market in stride and perhaps come to terms with the prospects of extreme volatility among eur and usd major pairs until stability returns or catastrophe runs its course. Like with any forest fire the old stalwarts are destroyed and life begins anew. The initial destruction cannot be fully measured until its run its course but brighter days lay just ahead. The fires of 2009 may have subsided but its embers are still growing bright red.  The Aussie, Kiwi and Cad seem to have come into their own and sit at or near record highs against both the Euro and the Dollar while Gold continues its climb to unchartered territories. As temperatures rise, embers smolder and fires come and go the market’s direction will be subject to winds and whims.  An astute trader embraces the cycle and its consequences. After all, once the smoke finally does clear its new inhabitants will only have the sky as their limit.

What has defined the economic conversations of the last couple of weeks?  Most would quickly point to the debt ceiling negotiations in the US and the ongoing debt crisis in the EU, with a focus on the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) and more recently the EU summit to address said crisis.

The euro has been getting pummeled, down almost seven cents in the past couple of months and the bad news has been nonstop.  Banks failing stress tests, the basic acceptance that Greece will be defaulting in one way or another, the list goes on.  Today, there was a bit of a turn of events, and the euro responded by rallying from 1.4259 to a high of 1.4415, after having dipped early in the day as low as 1.4138.

So why the surge?  Perhaps after all of this selling pressure, a correction was inevitable.  More likely though is the leaked documents from the EU summit, suggesting that rates on any new loans to Greece will have a rate of only 3.5%, and that the loans already issued by the European Financial Stability Facility (ESFS) will have their terms doubled, from 7.5 years to 15 years.  If in fact Merkel and Sarkozy are able to come to an agreement and pony up more to help their struggling neighbors than the market had recently been expecting, we may see some of the bleeding start to clot for the beaten down euro.

On the other side of the Atlantic, the news for the US economy hasn’t been much better, with Philly Fed Chairman Plosser commenting to the media yesterday that the Central Bank has been preparing for the scenario of US default – not a great way to instill confidence in the shaky markets Mr. Plosser – thanks.

As the GOP and POTUS struggle to come to a deal, and the debt ceiling deadline closes to t-minus 2 weeks, nerves have been high.  The greenback though trades in a bit more tricky manner, because even though the news has been unnerving to investors, and bad for equity markets, the USD hasn’t lost strength across the board, mostly due to its status as a safe haven currency, even when the danger stems from the US itself.  If we take a quick peek at gold though, we get a clearer picture of the dollar’s real strength, and that is one steep trend line, with XAU/USD shooting up from a recent low of $1489 at the start of this month, to a record high of over $1600 an ounce!  The sharp rise in gold is indicative of the markets’ general fears.  Today, we had a drop in gold relative to the dollar though.  This afternoon, the New York Times reported that Obama and Boehner might be close to a deal, and that they are bringing their respective parties into the loop on where things stands.  The market liked this calming report and gold dropped by about $15 an ounce on the news.

Other reports overshadowed by politics today included a worse than expected jobless claims report, rising to 418,000.  The Dems were hoping for a figure below 400k, and they did not get it – still though a clean and substantial resolution to the debt ceiling issue will overshadow this and any other weekly report.  As this week comes to a close tomorrow, keep your political science hats on, because the political dynamics on both sides of the pond are and have been driving price action.

While traders worldwide eagerly await the euro zone summit and news on the US debt ceiling limit being raised, let’s focus on the happenings of today for a moment. Wednesday’s trading session can be summed up as “the calm before the storm” however, there was still plenty of action.

There is optimism that we could see an agreement on Greece’s all too publicized debt crisis and this has lifted the single currency back over 1.42 versus the George Washington. Yesterday’s mild rise in crude oil helped push the loonie north and the yen’s run on the greenback sometimes looks as though it will never end. However, we all know from experience that what goes up, must come down. Gold spiked $12 to $1600 and that boosted the Aussie dollar back into the mid 1.07 zone. We could see AUD/USD test 1.08 in the next 48 hours…or less. Keep your eyes peeled. In a battle of risk against flight to safety – the EUR/JPY for a majority of the day appeared as though it wanted to touch 110, but by day’s end it had managed to climb to 112.

VT Trader forex trading platform charts below show indicators from our customized suite of technical analysis tools and charting software.

USD/JPY features Choppiness Index Indicator with Chaos Fractals Reversal Trading System (yes, VT Trader has trading systems) and XAU/USD displays Double stochastic Oscillator and also features Elliot Oscillator indicator on the bottom.