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Wednesday, 30 Apr 2008
All Eyes on the US Interest Rate Announcement
Yesterday, the USD gained against most of the major currencies on speculation the Federal Reserve will signal that it has finished lowering Interest Rates after 6 reductions since September.
The dollar traded at 1.5559 vs. the EUR at 6:10 a.m. in Tokyo, after rising 0.6% yesterday and touching 1.5541, the strongest rate since April 3.
Futures on the Chicago Board of Trade show an 82% chance the Fed will cut the target rate for overnight lending by a quarter of a percentage point to 2% today and odds of 71% that the rate will be held at that level in June.
Only a week ago, the USD plunged to a record-low against the EUR, boosting demand for raw materials as a hedge against inflation. Now, following the rising confidence in the US currency, commodities dropped the most in 5 weeks as a rally by the USD eroded demand for energy, metals and crops as alternative investments.
A stronger dollar will reduce some benefits for US exporters, but it could help curb inflationary pressures. Currency analysts attribute the greenback's return from a historical low of 1.6017, mainly to short USD selling and profit-taking.
Fundamentally, the dollar is still weak. The majority of indicators reflect major weakness in the US economy. Today we expect heightened USD volatility to continue as the 1st quarter GDP figures are scheduled for release at 12:30 GMT. Gross Domestic Product figures may show that the US economy shrank in the first quarter while Friday's jobs report is also expected to show payrolls fell 80,000 in April.
The ADP Nonfarm Employment Change and the Chicago PMI figures are also due to be released today. These market moving indicators are also forecasted to set a lower result in comparison to the prior month. A result below the expectation will probably produce bearish momentum for the USD, as it would be clear proof that the world's largest economy is in a stage of contraction. On the other hand, a reading in line with expectations isn't likely to spark much reaction as traders will be anxiously awaiting the FOMC decision as well as Friday's Nonfarm Employment Change.
The EUR hit a 4 week low vs. the greenback yesterday as poor economic data from the Euro zone dented the ECB hawkish monetary policy sentiment. The European currency also slid following the greenback's appreciation on views that the U.S. rate cutting cycle could end soon.
By the end of the day, the EUR was down 0.6% and traded at 1.5559, having earlier hit a low of 1.5542 against the USD.
Retail sales fell almost across all of the Euro member states with only Germany showing its Consumer Confidence figures up, as was seen on Monday. Higher food prices led to sales of food falling in Europe by the fastest rate in more than 2 years. This suggests that Retail Sales across the region will probably see a similar decline. French Consumer Confidence also fell to its lowest since 1987, adding to a view that the Euro zone economy isn't insolated from problems pushing the U.S. economy to the verge of recession.
The accelerating European inflation continues to squeeze consumer income. The strong EUR dampens exports. Low exports contribute to a growth slowdown which places the ECB under pressure to lower rates. While markets are expecting a slightly hawkish tone from the US FOMC's statement accompanying the rate decision, poor economic data from the Euro zone raises doubts on the ECB's ability to maintain its tough stance on inflation and Interest Rates.
The only thing that can possibly trigger a meaningful turn in the single currency is the Interest Rate cut by the European Central Bank. If economic data deteriorates even further, the central bank may have to seriously consider this possibility.
German unemployment is due today and we expect the employment numbers to be unchanged. Later the Consumer Confidence, the Italian CPI and the European Unemployment Rate are also scheduled for release. Most of these indices are expected to set relatively weak figures.
Overall, the EUR is expected to remain resilient as traders are expected to exercise caution ahead of Friday's US fundamental announcements. A bullish movement against the greenback will probably resume only after the weekend.
From the 'long range' perspective, as long the Interest Rate differential between the U.S and Europe continues to widen, the EUR will remain the preferred currency amongst traders.
All of the JPY crosses have sold off yesterday with the biggest drop seen in GBP/JPY and NZD/JPY. The low yielding Yen also strengthened against the USD - sparked by a rise in risk aversion.
Investors are seeing signs of an economic slowdown in Japan, and yesterday's news events from the Asian powerhouse only added to such assumptions. Japanese PMI fell on news that rising production costs have contributed to a lag in exports. Also yesterday we saw the lowest return of Japanese Industrial Production in just around 5 years. The 3.1% drop was much deeper than initial forecasts of 0.7%. An unexpected drop in unemployment rate as well as overall Housing Starts numbers rates has contributed to poor Japanese economic outlook.
The Japanese currency is likely to remain bearish ahead of today's JPY Housing Starts figures and the US Interest Rate announcement. Apart from that, there is no important economic news expected to be released from the Japanese markets. Investors should look toward global news, to chart the next JPY movement.
After bottoming at 1.5545 yesterday, the pair now shows local signs of a correction. The 4 hour chart is showing that the bullish move might not have enough steam in it, and that the bearish trend will probably resume before the weekend. Selling on highs might be a good strategy today.
The daily chart is showing the early stages of a bearish channel, as the cable now floats at the bottom barrier of it. A break beyond the 1.9610 will validate the bearish trend and will give the pair a next target price of 1.9535. Forex traders should wait for the breach before shorting the pair.
There is a narrowing bullish channel forming on the daily chart, as the pair now floats around the bottom barrier. The local momentum is still moderately bearish which makes it preferable for Forex traders to look for a good entry price for a long potion.
The bullish momentum which was created by the breach through the channel is slowly calming. The pair is shaping into a flat consolidation mode with no fresh direction signals. Traders are advised to wait for a clear sign before going in on this one.
The Wild Card
WILD - Crude Oil
There has been a sharp breach beyond the bottom barrier of the sharp bullish channel. The Slow Stochastic is showing a fresh bearish signal in the form of a triple top which indicate a very strong possible bearish corrective move. Forex traders must wait for the breach to validate before taking the short position.
|06:00||JPY||Prelim Machine Tool Orders||y/y||40.3%||*||-|
|07:00||EUR||German Trade Balance||18.5B||19.3B||-|
|10:00||GBP||Inflation Report Hearings||*||*||*|
|15:00||GBP||NIESR GDP Estimate||0.8%||*||-|
|23:30||AUD||Westpac Consumer Sentiment||-3.0%||*||-|
|23:50||USD||BSI Manufacturing Index||9.7||11.3||-|
|23:50||JPY||Tertiary Industry Activity||m/m||-0.4%||0.7%||-|
|05:00||JPY||BoJ Monthly Report||*||*||*|