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Monday, 24 Jan 2011
Hawkish Comments by Trichet Support Euro Strength
An interview over the weekend with European Central Bank President (ECB) Jean-Claude-Trichet highlights what many traders already suspect; the ECB will not hesitate to fight euro zone inflation.
USD - Dollar Begins Week on its Back Foot
At the end of the trading week the greenback was trading lower against the majors. Broad based selling of the dollar was seen with the greenback down following differentiating interest rate expectations between the US and the rest of Europe. Rising inflationary pressures in both the EU and in Britain may force those respective central banks to raise their benchmark interest rates to fight off rising inflation.
US inflationary pressures are considerably less as the Federal Reserve continues with the loosening of monetary policy. The Fed has given no signal of its intention to abandon its quantitative easing program and looks to complete the purchase of $600 billion worth of treasury bonds.
The dollar could continue to decline this week if momentum carries short dollar positions further. The key events for the dollar will be Tuesday's release of consumer confidence numbers, Wednesday's Federal Reserve Open Market Committee meeting, and Friday's Advanced GDP data for the 4Q 2010.
EUR - Hawkish Comments by Trichet Support Euro Strength
In a Wall Street Journal interview, European Central Bank President Jean-Claude Trichet talked up the ECB's intention to fight inflation despite disparities in growth rates between central Europe and the peripheral states.
Trichet was adamant in his hawkish view on inflation and vowed to battle inflationary pressures. Last month the rate of inflation in the EU rose a surprising 2.2%. This was the first time in two years that the rate of inflation was greater than the ECB target inflation rate of 2.0%.
The ECB President stressed the ECB is determined to fight inflation attributed to rising commodity and food prices. Trichet also supported budgetary constraints and fiscal discipline in the EU nations, suggesting oversight for EU nations in keeping with enacted austerity measures. He does not see risks of an economic downturn due to sovereign budget cuts.
The euro received strong bids this past week, both against the dollar and versus the Swiss franc as interest rate expectations increased between Europe and the rest of the world. Further hawkish comments from the ECB should be supportive of the euro into the new week of trading.
While the event occurred over two years ago, traders should not forget the interest rate hike by the ECB in July of 2008, only a few months prior to the demise of Lehman Brothers. This should underpin Trichet's commitment to eliminating inflation in the EU. As such, traders should take note when the ECB President addresses the markets.
JPY - Downtrend Resumes for USD/JPY
Recent price action in the pair hints at a continuation of the long term downtrend. Following a new year's rally with the price of the USD/JPY climbing to 83.70, the pair has begun a new decent with last week's low coming in at 81.80.
Renewed strength in the yen could spark another round of market intervention by the Japanese Ministry of Finance (MOF). In mid-September the MOF intervened in the FX market in order to weaken the Japanese yen.
As the JPY continues to strengthen, traders should consider the MOF may intervene again should the yen push to new highs. A mark for traders to watch could be sustained selling of the USD/JPY below the 82 level.
Tuesday's meeting by the Bank of Japan and the accompanying monetary policy statement may offer harsh rhetoric for those FX traders that are intent on testing the will of Japanese policy makers to once again intervene in the foreign exchange market.
Crude Oil - Crude Prices Recover from Thursday's Decline
Last week the price of spot crude oil reached a 2.5 year high but finished the week lower. An improving global economy along with positive economic sentiment is driving commodity prices higher.
However, higher reported GDP numbers from China increases expectations of future monetary policy moves by China in order to stem the flow of inflation. Any tightening of Chinese monetary policy may limit growth rates as well as demand for commodities.
Crude oil prices stabilized on Friday following a sharp decline of 2.75% on Thursday. This may present a buying opportunity in crude oil as the price approaches the $87.20 support level as well as the rising trend line from the August low that comes in today at the same price.
Friday's candlestick ended with a shaved head, indicating that momentum is to the upside. As such, traders should expect further gains in the pair with a target near the 61.8% Fibonacci retracement level from the November to January move. This level coincides with the resistance level from October at 1.3740.
Since New Years the pair has booked impressive gains, climbing from a low of 1.5340 to last week's high at 1.6060. The pair appears to be taking support from the 10-day exponential moving average which comes in today at 1.5885. This may be an appropriate level to place an entry limit buy order.
On Thursday the pair found resistance at the 55-day moving average, an indicator that has shown in the past its ability to act as a support or resistance level. This level comes in today at 83.10. Support for the pair is found at last week's low at 81.80.
The downtrend in the pair continues with the price retracing a full 61.8% of the December move, and then abruptly turning lower. Traders should be short on the pair with a first support level at 0.9520. Resistance comes in at 0.9685 and 0.9780.
The Wild Card
After completing a head and shoulders pattern last week with a breach below the rising neck line that runs under the October - January lows, the commodity appears to be reverting back towards the neck line. This may give forex traders another opportunity to enter short if the price reaches the neckline today at $1,360.
|02:30||AUD||MI Inflation Gauge||m/m||0.1%||-||-|
|03:00||AUD||HIA New Home Sales||m/m||-2.3%||-||-|
|03:30||AUD||ANZ Job Advertisements||m/m||1.3%||-||-|
|03:35||JPY||Final Manufacturing PMI||51.4||51.4||-|
|09:15||EUR||Spanish Manufacturing PMI||54.5||54.2||-|
|09:45||EUR||Italian Manufacturing PMI||54.1||54.6||-|
|09:50||EUR||French Manufacturing PMI (p)||49.6||49.6||-|
|09:55||EUR||German Manufacturing PMI||51.5||51.5||-|
|10:00||EUR||Final Manufacturing PMI||52.2||52.2||-|
|14:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||-|
|15:45||USD||Final Manufacturing PMI||53.8||53.8||-|
|16:00||USD||ISM Manufacturing PMI||53.5||53.6||-|
|16:00||USD||ISM Manufacturing Prices||49.5||49.5||-|
|16:50||USD||FOMC Member Powell Speaks||-||-||-|