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Tuesday, 29 Jan 2008
Market awaits for tomorrow's rate cut
The greenback continued to take a hit as yesterday's New Home sales figure spurred speculation that the Federal Reserve will cut its benchmark lending rate by 0.5% this week to prop up the economy. The Fed will announce its rate decision tomorrow at the end of a two-day policy meeting. Interest Rate Futures reflect a roughly 90% chance of a 0.5% rate cut by the Fed this week.
Short-term U.S. interest rates are already among the lowest in the developed world, encouraging investors to borrow in dollars and buy another currency to profit on the difference in yields, which would put pressure on the dollar.
Data showing sales of new U.S. homes declined in December, stoking fears of an imminent economic recession. Purchases of new homes in the U.S. unexpectedly fell yesterday to a 12-year low in December, ending the worst sales year since 1963. Sales decreased 4.7% to an annual pace of 604K, according to Washington Commerce Department.
By now, markets show little willingness to force a dollar bounce ahead of a critical week of U.S. economic developments. We may see the greenback remain in a relatively narrow range against the EUR ahead of the highly anticipated U.S. Federal Reserve rate decision due Wednesday, while similarly critical Non Farm Payrolls data will be due Friday.
Today, the release of the U.S. economic data will likely highlight some of the reasons why traders are ramping up speculation that the country is in midst of a recession. Durable Goods Orders are forecasted to rise 0.1% after falling 0.8 % during the month prior. On the other hand, the U.S. Consumer Confidence is forecasted to fall to a 2 year low.
The Federal Reserve's emergency rate cut helped propel the EUR/USD up towards the level of 1.4900. However, with Fed Futures pricing in another round of rate cuts on Wednesday and the ECB maintaining a hawkish tone, it may only be a matter of time before the pair takes its rally towards the psychologically important 1.50 level.
Meanwhile, yesterday's European M3 Money Supply contracted for the first time in 4 months suggesting that the slowdown in lending and business activity is spreading across the Atlantic. The M3 indicator, which measures the value of all currency and liquid cash assets held by the public, printed at 11.5% which was considerably lower than the 12.3% forecast. The news took traders by surprise and EUR/USD immediately plummeted 30 points before stabilizing and recovering back to the 1.4700 level.
In the following days, there are only a bits pieces of potentially market moving European economic data, namely Euro zone retail PMI, German unemployment, German Retail sales and manufacturing PMI. The lack of big events on the European calendar suggests that the movements of the EUR will be largely driven by the U.S. economic data.
Fears of a U.S. recession have now spread to Japan as slowing global activity and dropping foreign demand have led to speculations of Japan also entering a recession.
As expected, the Bank of Japan kept its leading interest rate unchanged at this past week's monetary policy meeting. The central message from the BoJ remains that it believes that the current weakness in the Japanese economy is temporary, and that the next move in interest rates will probably be up.
Today there is no economic data expected to be released from the Japanese markets apart from the Industrial Production, which is expected to finally move into positive territory. The JPY may still continue to drop further downwards against the USD during the day, although it appears that the pair has apparently stabilized in the 106.00-108.00 area.
Trading the USD/JPY pair this week is likely to be dominated almost exclusively by the U.S. news flow. Therefore, traders will be looking ahead to the 2 key events on the U.S. calendar this week- the FOMC and NFP.
The pair is in the middle of an uptrend initiated at 1.4350, and appears to be having some more room to run on the daily level. On the 4 hour chart there is a bearish cross forming indicating that there might be a bearish correction before the uptrend resumes.
After bottoming at 1.9360 the cable is continuing the corrective move at full momentum and is now floating around 1.9840. All oscillators show that the correction move still holds some fuel in it, and if the 1.9900 level will be breached, a new uptrend will be validated and might push the cable above the 2.0000 level once again.
The pair is trading in a range for almost two weeks now, and has formed a very strong support at 105.20. The local momentum appears to be bullish but the daily trend is a very strong bearish one. Traders must look for a key break on the bearish side before considering an entry position, as the range might continue before one occurs.
After several failed attempts to breach through the 1.0850 level, it appears that the pair might make an additional attempt of a break. If and when a breach of that level occurs, it will most probably unleash an intensive follow-up bearish trend that might be targeted at 1.0750 at its lowest point. Going short appears to be preferable today.
The Wild Card
Oil has been traded in a very distinct bearish channel on the 4 hour chart since the beginning of January. The first breach through the upper barrier of the channel has occurred and a very strong bullish trend is expected to take Oil back into the 95.00 levels towards the beginning of next week. This is a great opportunity for forex traders to join a very strong potential trend that might yield high profits.
|03:00||CHF||Daylight Saving Time Shift||-||-||-|
|03:00||EUR||Daylight Saving Time Shift||-||-||-|
|03:00||GBP||Daylight Saving Time Shift||-||-||-|
|01:00||EUR||German Prelim CPI||m/m||0.9%||-||-|
|01:00||EUR||Italian 10-y Bond Auction||1.36|1.5||-||-|
|01:50||JPY||Prelim Industrial Production||m/m||3.7%||-||-|