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Wednesday, 14 Jan 2009
EUR Traders are Pricing in Tomorrow's Anticipated Rate Cut
Over the past week, traders have witnessed a gradual depreciation in the value of the EUR. This has been brought about by negative economic news as well as the assumption that the European Central Bank (ECB) will have to enact strong measures to bring about a correction to the value of its currency. This morning, as traders plant their steady positions in expectation of tomorrow's rate cut, we have begun to see some upward movement to the EUR as many may actually believe that a rate cut will not weaken the currency, but ultimately bring its value up against most other currencies.
USD - Dollar Makes Moderate Gains against Pound and EUR
The U.S. Dollar recorded some big gains against its major currency pairs in yesterday's trading. The most notable gains were against the Pound Sterling and the EUR. However, the USD/JPY remained flat. The EUR dropped 150 points against the Dollar, adding to the Dollar's rally of nearly 300 points against the European Currency since Monday to close at 1.3195. Against the GBP, the Dollar rose a dramatic 250 points, adding to its recent rally against the GBP of over 600 points since the beginning of the week.
The Dollar's gains in recent days are owed to several factors. Firstly, investors foresee the inauguration of President-elect Barack Obama in 6 days as a massive boost for the Dollar and the U.S. economy. He recently unleashed his idea for an economic bailout plan of nearly $1 trillion. Additionally, he intends to make dramatic tax cuts for the American tax payers. These 2 stimuli are intended to boost the U.S. economy out of the current recession. The Obama factor has helped the Dollar gain against some of its major currency pairs since the start of the year.
Secondly, the Bank of England (BoE) cut Britain's Interest Rates last week, which has led to the Dollar rally against the GBP. Thus, the Dollar's bullishness against the Pound is obvious. Consequently, Britain's rate cuts led to pressure on Europe and the EUR, resulting in the President of the European Central Bank (ECB) declaring that Euro-Zone Interest Rates will be cut to stem Europe's failing economy. With regards to the EUR, investors are already anticipating that the ECB will cut Interest Rates by at least 50 basis points to 2.0% this Thursday.
The other important factor that has worked in the Dollar's favor is weak economic figures coming out of the Euro-Zone and Britain. Additionally, the U.S. has released some better-than-expected figures in recent days. For example, the trade balance figures released on Tuesday were over $10 billion higher than forecasted, possibly indicating that the U.S. may rise out of recession quicker than many had anticipated. Many in the financial world now say that the U.S. economy may recover by the 1st quarter of 2010, rather than the 3rd quarter of 2012. More positive economic news coming out of the U.S. will only strengthen the Dollar in the coming weeks.
EUR - EUR Fluctuates as ECB Considers Rate Cut
The EUR plummeted 150 points against the Dollar in yesterday's trading, adding to the EUR's decline of nearly 300 points against the U.S. currency since Monday to close at 1.3195. The 2 main reasons for the EUR's decline against the USD in recent days is due to the expected Interest Rate cut this Thursday and a deepening economic recession in the Euro-Zone. The European Central Bank (ECB) is expected to cut the Interest Rates of the Euro-Zone by 50 basis points to 2.0%. This has led to the EUR's
decline against the Dollar in recent days as investors flock to the Dollar due to the EUR being unreliable and unstable.
Economic news in the past 2 weeks indicates that Europe's economy is in a much worse position than originally expected. In addition, the President of the ECB, Jean-Claude Trichet, recently said that he may cut rates to near 0% in the coming months. This is a turnaround, as the ECB previously employed a very tight fiscal policy. However, as Europe's economy is likely to spiral downwards in the coming months, the Euro-Zone is likely to join Britain, the U.S., and Japan with historically low Interest Rates. Versus the Dollar, the EUR is likely to decline as Europe's economy declines faster than that of the U.S.
Today, the most important economic news event coming out of the Euro-Zone is the Industrial Production data release at 10:00 GMT. It measures the value of output that is produced by manufacturers, utilities, and mines after being adjusted for inflation. If the release is higher than the 2.1% forecast, then this may lead to a bullish correction in the EUR against its major currency pairs. On the other hand, if the results are the same, or less than forecasted, this is likely to lead to an even more bearish EUR versus its major currency crosses. Traders are also advised to pay close attention to the U.S. Retail Sales figures, which are due to be released at 13:30 GMT. Better-than-expected figures are likely to support the USD against the EUR.
JPY - JPY's Spike Set to Hit Japan's Exports
The JPY recorded gains against all of its major currency pairs in Tuesday's trading. The most significant were against the EUR and the Pound. However, the USD/JPY pair closed at a relatively flat rate of 89.25. The JPY gained over 100 points against the EUR to close at 118.01. The GBP/JPY closed down over 200 points yesterday at 129.70. The rise of Japan's currency in recent days is owed much to Britain's Interest Rate cut, and Europe's anticipated rate cut this Thursday. As countries around the world cut Interest Rates to stem the global economic recession, the Yen has gained strength against these currencies, as people are returning to the Yen as the carry trade position is less attractive, as other world Interest Rates tumble.
The Yen's strength in recent months has led to a sharp fall in Japan's exports. Moreover, the massive increase in the Yen's strength has dramatically worsened Japan's economic recession. Last week it looked as if the Yen may lose some of its value, but as recent events have shown, the JPY's losses were short-lived. The medium-term seems bleak for Japan as the global economic crisis deepens. Only an unexpected economic recovery led by the United States will be able to rescue Japan's economy in the coming months. Therefore, expect the Japanese currency to make more historic gains against its currency pairs in the coming weeks.
Oil - Oil Prices Rise as Saudis Cut Production and Gaza War Prolongs
The price of Crude Oil increased dramatically yesterday by nearly 200 points to close at $38.92 a barrel. This marks a reversal for the black gold as the prices of this commodity have tumbled since the latter half of last week. The cause of Oil's price spike yesterday was due to Saudi Arabia cutting the production of oil more than they previously stated at OPEC's last meeting on December 17th. This comes about as Arab regimes have lost alarming amounts of money due to Oil's drop of over $100 a barrel since July. The Saudis used this act as a precedent to prevent Oil prices from falling further.
The prolonged war in Gaza has also added to uncertainty to Oil prices. This is the case, because the Israel-Gaza War was originally expected to last a maximum of 1-2 weeks. Yet the War will soon be in its 4th week. What fears people most is a possible escalation of the War, which may lead to a wider regional conflict. As long as these fears exist, Oil is unlikely to fall below $35 a barrel in the coming week.
The daily chart's RSI signals that this pair is being over-sold and will likely see strength added to the recent upward movement. However, a bearish cross on the hourly chart's Slow Stochastic signals that a downward correction may be imminent in the nearest time frame. Waiting for a clearer signal may be the right strategy today.
The price for this pair currently floats in the over-sold territory on the 4-hour chart's RSI, indicating that an upward correction may occur later today. The recent bullish cross on the 4-hour chart's Slow Stochastic supports this notion while the hourly chart's Bollinger Bands are beginning to tighten, indicating that moderate price volatility is imminent. Going long with tight stops might be the right choice today.
It appears that the price has recently moved towards the upper border of the hourly chart's Bollinger Bands, indicating that there is downward pressure. However, a bullish cross on the daily chart's Slow Stochastic indicates that there may be some momentum left in the recent upward correction. It may be a good strategy to wait for a clearer signal from this pair.
The price of this currency pair is currently floating in the over-sold territory on the hourly chart's RSI, signaling an upward correction may occur soon. The recent bullish cross on the hourly chart's Slow Stochastic supports this notion. Going long with tight stops might be a good strategy today.
The Wild Card
It appears a violent breach of the lower border on the daily chart's Bollinger Bands has recently occurred, signaling that there is upward pressure on this pair. Supporting this notion is an imminent bullish cross on the daily chart's Slow Stochastic and a recent bullish cross on the 4-hour chart's Slow Stochastic. The RSI on the 4-hour chart also indicates that the price currently floats in the over-sold territory. Forex traders can benefit by entering long positions early and riding out this imminent upward price movement.
|10:00||EUR||M3 Money Supply||y/y||4.6%||4.9%||5.3%|
|11:00||EUR||Italian Prelim CPI||m/m||0.3%||0.1%||0.2%|
|14:30||USD||Prelim GDP Price Index||q/q||-0.1%||-0.1%||-|
|16:00||USD||Revised UoM Consumer Sentiment||95.9||90.0||-|
|16:00||USD||Revised UoM Inflation Expectations||-||2.5%||-|