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Wednesday, 19 Mar 2008
Dollar Bounces Back After Rate Cut
Yesterday, the greenback rose all across the board after that the Federal Open Market Committee (FOMC) voted to lower the US Interest rate by 75 pts to 2.25%. The Fed announcement, which returned below the expected 100 point cut, set the USD on a bullish run as it appreciated against most of the major traded currencies particularly the EUR/USD pair which dropped close to 150 pips.
The FOMC decision came as a last hope to help the US economy and the greenback recover from what has looked to be recessionary behavior. Following the announcement, Philadelphia Fed President Charles Plosser made it public that he voted against the 75pt cut as he preferred less aggressive action at the Fed meeting. Investors felt a boost of confindence yesterday in regard to the severity of the financial difficulties in the US, as the combination of the lower cut and general objections by some of the board, may indicate that the economic outlook is not as bad as once expected. It certainly seems that the USD and the US economy have recovered from what had been some of its worst results since 1945.
Yesterday also saw the release of PPI figures as they rose 0.3% in February following a 1% increase in January. Core inflation rose 0.5% for the month, the largest gain since November 2006. The extremely high inflation in the US has increased speculations and worries that the country is heading toward a period of stagflation, a period characterized by economic slowdown and a rise in inflation.
Another result of the 75pt cut yesterday was a sell-off on commodities. Gold and Oil prices depreciated yesterday after trading in and around all time highs last week. Gold lost $35 per ounce roughly 3.2% down from the day before and closed the trading session at a rate of 986.50. Crude Oil lost almost $5 per barrel losing 4.1% from its Monday value.
Today the US is absent from any significant scheduled news events, as Crude Oil Inventories are the only news in tap, and should not contribute to volatility. Forex traders should follow indicators coming from the Euro zone, the United Kingdom and Japan.
Yesterday, the Euro-zone was absent from the economic calendar and most of the Euro movement was contributed to the dominance of the Dollar yesterday. The EUR depreciated yesterday against the greenback on the back of key interest rate cuts in the US. The EUR retreated from its all time high at the rate of 1.5850 from last week as the pair closed the trading session down 150pts. However, looking ahead long term, the EUR is expected to recover and gain back some of its losses from yesterday, mainly as a result of the continuing positive indicators being released from the Euro-zone. Meanwhile the GBP appreciated against the USD and peaked at a three days high at the rate of 2.0255 in the first half of the day. However, after the Fed's key interest cut, the GBP lost most of its gains and closed the trading session at the rate of 2.0080.
Looking ahead to today, the only news expected from the European economy will be the Trade Balance. This figure is considered insignificant to Forex market movement and should not have any impact on EUR behavior today. Meanwhile, the MPC Meeting Minutes from the Bank of England (BoE) is expected to be released in the United Kingdom. The minutes are forecasted to show that 8 BoE members voted to hold the interest rate and 1 BoE member voted to cut it. Forex traders should follow this figure because it could have an extreme effect on the GBP behavior during the day.
Yesterday, Asian markets saw a steady rise on the back of the US Interest Rate cut. Scheduled economic figures from Japan were limited to the All Industries Activity Index yesterday. This had little to no impact on JPY behavior. JPY movement was dominated by the bullish greenback as it slipped all across the board, against all traded currencies. The JPY lost 3% of its value against the USD and the GBP and 2% of its value against the EUR and the AUD. The 75pts cut in the key interest of the US encouraged investors to re-enter risky carry trades funded by cheap borrowing in the JPY as well as going long with the USD/JPY, EUR/JPY, and GBP/JPY pairs.
Today, BoJ Governor Fukui is expected to give a speech at 10:00 GMT in Tokyo. Forex traders should expect to see some indication regarding the BoJ economic policy for the near future. The JPY is expected to continue to be extremely sensitive in relation to the USD behavior. Toshihiko Fukui's five-year term set to expire on Wednesday. The Japanese government is set to present a new nominee, though there should not be much change in the overall outlook of Japanese economic policy.
Today will be an interesting one for the JPY as it will be pulled between bearish behavior in the Forex market and bullish behavior in the stock market; it is safe to say that range trading should be expected.
After bottoming out at 1.5620 after the Fed rate cut turmoil, the pair appears to be resuming its familiar bullish path. The daily chart is showing a bullish cross on the slow stochastic as the hourlies are still moderately bearish. Buying on dips looks to be an excellent choice today.
The cable is floating between two major Fibonacci key levels with bullish momentum on the daily chart. The 4 hour RSI is floating on the 50 level with a positive slope which indicates that we might see a test of the 2.0230 level before the weekend. Being on the buy side appears to be preferable.
The 4 hour chart is showing that the bullish corrective momentum has diminished and is now slightly bearish. The bearish cross on the slow stochastic strengthens the bearish behavior of the pair, and could see a valid target price at 98.10.
After a very sharp drop and a test of the 0.9630 level, the pair has shown a moderate correction. The daily chart is giving mixed signals, and the 4 hour chart is slightly bearish. Forex traders are advised to wait for a clearer signal before entering the market with that pair.
The Wild Card
There is a very distinct bullish channel forming on the daily chart as Gold is now floating on the bottom part of the channel. The momentum is now bullish again as indicated by all oscillators. This is a great opportunity for forex traders to rejoin the very strong bullish trend at an excellent entry point.
|08:00||EUR||German Retail Sales||m/m||-3.2%||1.7%||-|
|08:45||EUR||French Consumer Spending||m/m||-0.8%||0.2%||-|
|09:00||CHF||KOF Economic Barometer||99.8||100.1||-|
|10:00||EUR||Italian Monthly Unemployment Rate||12.6%||12.6%||-|
|10:00||EUR||Italian Quarterly Unemployment Rate||12.5%||12.4%||-|
|11:00||EUR||CPI Flash Estimate||y/y||0.4%||0.3%||-|
|11:00||EUR||Italian Prelim CPI||m/m||0.1%||-0.3%||-|