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Wednesday, 20 Feb 2008
Core CPI On Tap
Yesterday's trading session was characterized by low volatility due to a lack of any significant economic news events. As a result, the greenback saw small losses as it range traded against its major currency rivals.
In U.S. share markets, a more consistent trend of bearish behavior took place as the NASDAQ fell by -15.60 points (-0.67%) whilst the Dow Jones was also down by -10.99 pts (-0.09%). Crude oil floated close to $100 a barrel last night, rising by just under $5 a barrel which contributed to the dollar's mild reduction yesterday.
The release of the NAHB homebuilder confidence index yesterday surprised the market by rising for the second straight month, though the figure is still below standards as it creeps towards lows seen last in the US recession of 1991.
Looking ahead to today's basket of US economic events, the 13:30 GMT release of Core CPI is expected to show at 0.2%, equaling last month's result. Housing Starts figure, also to be released at 13:30 GMT are forecasted to return at $1.01 Million also on par with last month's number. Building Permits are expected to return with identical numbers to last month's 1.05 Million dollar figure. Wednesday's US calendar will be wrapped up by the 19:00 GMT release of the FOMC meeting minutes as volatile conditions can be expected. The FOMC meeting is generally a good source of information regarding future polices regarding the dollar and interest rates. The January 30 FOMC meeting called for a vote regarding a 50bp rate cut for the dollar. If the aforementioned figures meet their expectations, Forex traders may interpret it as a positive sign in a relatively gloomy period for the US economy.
In other dollar related news, ten-year bond yields rose overnight to a one-month high of 3.90% on inflation fears; a strong reading could threaten technical resistance by around 4% and open the door for a sharp move toward higher long-term interest rates around the world.
Usually when a sharp positive movement in bond yields is expressed, the market atmosphere can be characterized as uncertain as traders could begin to seek low risk investment alternatives.
The latest trends in Forex trading hint toward a strengthening of the EUR ahead of expected Inflation reports. The EUR saw a small boost versus the dollar, as the often traded pair stayed above the 1.47 key level.
The Euro zone, along with the rest of the world's economies has been affected by a recent rise in food and energy prices. The futures market is currently pricing a EUR interest rate cut by 0.5% to 0.75% for this calendar year.
As such figures have added to speculation regarding ECB interest rate policies, one of the main reasons why the European Central Bank has refused to cut interest rates is the growing inflation pressures on the Euro zone economy. Today, their ongoing hawkish stance may be validated by the German producer price report (PPI), which is forecasted improve by 0.4% compared to last month's figure. As this is the only scheduled event on the European calendar, expect most of the EUR movement to come as a response to today's US data.
Since the beginning of February, the Yen crosses have been trapped within a wide trading range, making those involved in carry trading struggle to properly define the overall market outlook.
Volatility in the financial markets continues to be very high, which has made it very difficult for carry trades to recover from last month's poor showing. Investors should expect this situation to continue as the US economy is not reflecting any signs of stability in the near future.
The Japanese economy has found itself once again in its own recession scare, after most investors thought that Japan's economic recovery was completed. Yesterday's monetary policy meeting minutes touched upon Japan's wariness regarding downside risks from the US.
Today see's two scheduled events from the Japanese economy. At 23:50 GMT we will see the release of the All Industries Activity Index and Trade Balance figures. Both are expected to see mild improvement, as it could help put a positive spin on JPY forecasts.
Still, the key Japanese event will come on Friday, when BOJ Governor Fukui is expected to clarify the current status of Japan's economy and where it's headed in the near future.
Look for the JPY to continue range trading today, as it will be most affected by today's basket of US economic events.
The pair breached the 1.4720 level which validated the next bullish move, as we now see a consolidation around that Fibonacci level. It appears that the pair is accumulating momentum for the trend which might be expressed in a moderate bearish correction. Buying on dips might be a strong strategy today.
The 4 hour chart clearly indicates that the bearish trend has not yet said its last word. The slow stochastic is showing a classic positive slope structure which indicate on an upcoming increasing momentum. The daily chart supports the bearish momentum, as no clear reversal cross is in sight.
The familiar tight range we have seen the pair traded in, continues uninterruptedly. The main difference is that we now see the pair floating in a slightly wider range and with moderate bullish momentum. It would probably still be recommended to stay out of this one until a strong and distinctive signal will appear.
There is a very interesting wave pattern forming on the 4 hour chart, as the pair now initiated the second bearish move within the formation. Together with relatively strong bearish momentum on the slow stochastic, it appears that 1.0880 might be a valid target price.
The Wild Card
After spiking to the very impressive $100 level, it seems that Oil is the center of
forex trader's focus today. The inability to breach that level violently, together with many bearish indications by various oscillators is strengthening the notion that a sharp correction move is quite imminent. Going short with tight stops and limits might provide high profit potential.