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Tuesday, 14 Dec 2010
Markets Cautious Ahead of FOMC Meeting Statement
The Federal Reserve is expected to keep its benchmark Interest Rate unchanged near zero today, as traders get ready for a busy news cycle. The Fed Statement is expected to provide an assessment of the current economic condition in the world's largest economy and more importantly provide an economic outlook. The statement is likely to set the short term direction for the greenback.
USD - Dollar Falls Ahead of Heavy News Day
The dollar fell broadly against the other major currencies on Monday; partly on concern that a U.S. tax cut deal could swell the large budget deficit at a time when the Federal Reserve is committed to accommodative monetary policy. By yesterday's close, the USD fell sharply against the EUR, pushing the oft-traded currency pair to 1.3390. The dollar experienced similar behavior against the GBP and closed at 1.5860.
U.S. trade and budget deficit concerns have traditionally worried investors but they have been overshadowed in recent years by the collapse of the housing market, bad mortgages and their weight on the banking and financial system. Now, as the economy appears to be recovering, investor focus has shifted back to the budget deficit.
Looking ahead to today, all eyes are focused on the U.S. Federal Funds Rate statement scheduled for 19:15 GMT. The overwhelming consensus is that the Fed will hold the federal funds rate steady at near-zero, where the target has been since December 2008. The Fed Statement is expected to provide an assessment of current economic conditions in the world's largest economy, and more importantly provide an economic outlook. Short term dollar values will likely be decided as a result of the statement.
EUR - EUR Strengthening on all Fronts
The EUR strengthened against most of its major counterparts on Monday as traders cited a more tolerant attitude toward risk after China refrained from raising interest rates. As a result, the 16-nation currency extended its gains against the U.S dollar to rise above $1.34. It is currently trading around 1.3390. The EUR experienced similar behavior against the JPY as the pair rose from 110.65 to 112.75 by days end.
China's decision not to hike interest rates yet as part of an inflation-fighting program helped risk appetite overall, lifting oil prices and stock futures. Some traders also said hopes the European Union would work toward a permanent fund for supporting troubled countries when it meets this week, was helping the euro recover.
Investors should look for the unusual price volatility to continue in the EUR/USD as the pair attempts to stabilize and find new support and resistance lines. Large price jumps such as these are not common place and present terrific opportunities to take advantage of the price swings for large and profitable gains.
JPY - Yen Experiences Mixed Results against Major Currencies
The JPY finished yesterday's trading session with mixed results versus the major currencies. The Japanese yen extended gains versus the U.S. dollar on Monday, to finish around 83.45 amid a broad sell off in the greenback. The yen experienced similar behavior against the GBP as the pair fell from 133.04 to 132.30 by days end. The JPY did see bearishness as well, as it lost over 100 pips against The EUR and closed at 111.70.
Today, the movement of the JPY will likely be affected by the release of the Tankan Manufacturing Index. This index is a leading indicator of the country's economic health, since businesses are more likely to react quickly to changes in the market. A change in their sentiment can be an early signal of future economic activity such as spending, hiring, and investment.
Crude Oil - Crude Oil Prices Continue to Rise
Crude oil rose to the $89 level after China left interest rates unchanged and a report showed the country's refineries ran at record levels last month, signaling global demand will continue to climb.
Moreover, oil and other commodities denominated in dollars for global trading tend to rise when the U.S. currency falls as they become cheaper for holders of other currencies. A move away from dollar-based pricing of the world's leading commodity could further weaken the greenback.
Looking ahead, traders are advised to watch carefully the global stock markets and the major economic indicators which will be published from the U.S. and euro-zone in order to predict the next movements in oil prices.
The EUR/USD went increasingly bullish yesterday, and currently stands at the 1.3395 level. The daily chart's Slow Stochastic predicts this currency cross to rise further today. However, the 4-hour chart's Stochastic Slow signals that a bearish reversal will take place. Entering the pair when the signs are clearer seems to be the wise choice today.
The pair currently sits near the upper border of the daily chart's RSI, suggesting a downward correction may be imminent. The downward direction on the hourly chart's Momentum Oscillator also supports this notion. When the downwards breach occurs, going short with tight stops appears to be the preferable strategy.
The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic is providing us with mixed signals. Furthermore, the 4 hour charts are also not providing us with any clear signals. Waiting for a clearer sign on the hourly charts might be a good strategy today.
The pair recorded heavy bearish behavior yesterday. However, the technical data indicates that this trend may reverse soon. For example, the 4-hour chart's RSI signals that a bullish reversal is imminent. An upward trend today is also supported by the hourly chart's RSI. Going long with tight stops may turn out to pay off today.
The Wild Card
This pair's sustained upward movement has finally pushed its price into the over-bought territory on the 8-hour chart's RSI. Not only that, but there actually appears to be a bearish cross on the Slow Stochastic pointing to an imminent downward correction. Forex traders have the opportunity to wait for the downward breach on the hourlies and go short in order to ride out the impending wave.
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