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Tuesday, 26 Feb 2008
US PPI and Consumer Confidence On Tap
The strong selling of USD was boosted yesterday after hopes that a possible rescue plan for 'Ambac Financial Group', the second largest U.S. bond insurer, would help limit the damage from the ongoing credit crisis. Also yesterday, the US Existing Home Sales for January fell to the lowest level in 9 years while prices slid for the 7th consecutive month, posing a threat to consumer spending; the largest part of the enormous US economy. By the end of the day, the USD remained range bound vs. the EUR, while appreciating the most against its' high-yielding counterparts, most notably the JPY.
Economic data from the US now shows the effects of the worst housing recession in 25 years have spread into other areas of the economy. The Fed Bank of Philadelphia's general economic index fell this month to -24, the weakest reading in 7 years. With other major sectors such as Employment, the financial markets and business investment; the Fed now has more than just the housing market to contend with when making its monetary policy decision. Currently, the market is pricing at a 65% chance that the Fed will lower its Interest Rate by another 0.25%.
Today, traders may expect to see an overall increase in volatility as the US economic calendar filled with eventful releases like the PPI, National Home Price Index as well as the Consumer Confidence data, later in the afternoon. We expect the USD to rally on the back of stronger inflation numbers but weaker consumer confidence could cap the currency's rise.
The EUR was little changed yesterday at 1.4821, taking a breather after hitting a three-week peak of roughly $1.4862 last Friday.
The European markets rallied on hopes that 'Ambac', the embattled U.S. bond insurer, may soon announce a rescue package. 'Ambac', is currently facing billions of dollars of losses from guaranteeing repackaged subprime mortgages. The company is talking to banks and regulators about raising extra capital in order to retain its top credit ratings. With yet another fork in the road for invested US clients, the EUR continues to become a much safer and stable alternative for long term success.
Today, investors will focus mainly on the German Ifo Business Climate as well as German Ifo Business Expectations indices for February. Traders will try to find clues on the health of the Euro-zone economy and its' interest rate outlook. The underlying impression remains that the European economy is slowing down and that at some point we could see interest rates in the Euro-zone decline. The hawkish stance by ECB President Trichet could be challenged if the ongoing trends continue.
Today's economic news is particularly important for the EUR, and could be responsible for a key turning point in for the 15 Nation currency. It will be crucial for traders to identify how the preceding economic indicators from Europe and the US will affect the currency. Investors may expect another volatile trading session.
The JPY fell broadly yesterday as news over the U.S. bond insurance sector boosted stock prices and other risky assets. The JPY also fell after a report showed declines in the sales of Existing Homes in the U.S. slowed last month, signaling the housing slump may be closer to a bottom than ever before.
The USD/JPY dropped to a session low of 108.21 before consolidating around the 108.00 level by the end of late Tokyo session.
Risk aversion has subsided and appetite among investors to borrow in JPY and invest in risky high-return investments is back in play. The Yen often suffers in times of rising risk appetite because investors borrow it at low Japanese interest rates to fund "carry trades" that invest in higher-yielding currencies and assets.
It appears that in the short term the JPY might suffer in this environment. There is no significant economic news coming out of Japan today. We should see the JPY continue on its bearish path. As for the long term, we need to keep in mind that March is the most volatile month for JPY and we'll take a more in-depth look into what this could mean for the JPY crosses as we approach the pivotal month. As the Japanese fiscal year nears its closing we should begin to get a clear picture of future trends.
The pair has been going through a consolidation phase after a very strong and consistent period of bullish momentum which was initiated near the 1.4450 level. The daily chart is showing its first bearish signals, and the 4 hour chart is floating in neutral territory. It appears that a correction move might be quite imminent with the first target price of 1.4720.
The daily chart is showing a triple doji formation with a bearish cross on the slow stochastic. The 4 hour chart is already indicating escalating bearish momentum, with RSI and slow stochastic at a negative slope. It appears that going short might be preferable today.
The pair has not yet made a significant move beyond the flat range it has been going through in the past month. Forex traders are anxiously waiting for any breaks to signal an upcoming strong trend, yet none are coming. All oscillators are quite neutral, and no distinct direction is seen on the horizon. It is advised to wait for a clear sign before entering the market.
After going through a very choppy month, the pair finds local consolidation at the 1.0900 zone. The daily chart is showing some bearish momentum with negative slope on the slow stochastic, as the 4 hour chart is showing moderate bullish sentiment. It appears that selling on highs might be preferable.
The Wild Card
Gold is in the middle of a correction move that is now showing strong signs of support. It appears that it will not be able to breach through the 931.00 level which is a key Fibonacci level of the 854.70/953.20 move. The bullish cross on the hour chart is strengthening the notion that Forex traders might enjoy a great entry price for the upcoming bullish move.
|07:00||JPY||BoJ Outlook Report||-||-||-|
|08:00||EUR||German Retail Sales||m/m||2.5%||-0.8%||-|
|08:45||EUR||French Consumer Spending||m/m||0.7%||-0.3%||-|
|10:00||EUR||Italian Monthly Unemployment Rate||12.3%||12.4%||-|
|11:00||EUR||CPI Flash Estimate||y/y||0.3%||0.4%||-|
|11:00||EUR||Italian Prelim CPI||m/m||-0.3%||-0.1%||-|
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||-|
|13:30||USD||Employment Cost Index||m/m||0.7%||0.6%||-|
|14:55||USD||Revised UoM Consumer Sentiment||86.4||86.4||-|
|14:55||USD||Revised UoM Inflation Expectations||2.8%||-||-|