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Wednesday, 22 Oct 2008

USD Flies High While EUR Sinks

It is perceived that the U.S. economy is better positioned to stave off a recession with a relatively low interest rate to help spur economic growth. A continuation of a poor economic outlook in Europe will continue to work in the Dollar's favor, perhaps reaching a level below $1.2500 by the week's end.

EUR/USDGBP/USDUSD/JPYUSD/CHFAUD/USDEUR/GBP
Daily Trenddowndowndownupdownup
Weekly Trenddowndowndownupdownup
Resistance1.29551.6395100.001.17600.67950.7990
1.29351.637599.801.17400.67750.7960
1.29051.634599.501.17100.67450.7930
Support1.28451.628098.901.16500.66850.7870
1.28151.625098.601.16200.66550.7840
1.27851.623098.401.16000.66350.7820

Economic News

USD - Soaring Demand for USD Drives its Value to Remarkable Highs

Simulative government policies are being played out in the market as the USD rose to its highest level against the EUR since February of last year. At the same time poor sentiment is also being thrown into the market as the Federal Reserve announced a new $540 billion lending facility for ailing banks to shore up the money market industry. With the newest government program, the Fed continues to send signals to traders that the financial crisis has not subsided.

Currently, Euro-Zone recessionary fears are helping to drive the USD's recent gains. The GBP dropped below the $1.6700 level, shedding a whopping 749 points as the Bank of England said the British economy may see its first recession since 1992. The IMF also issued its fall report on the European economy which reaffirmed its recessionary forecast for the British and Euro-Zone economies.

It is perceived that the U.S. economy is better positioned to stave off a recession with a relatively low interest rate to help spur economic growth. A continuation of a poor economic outlook in Europe will continue to work in the Dollar's favor, perhaps reaching a level below $1.2500 by the week's end.

We are seeing an environment in which the USD is appreciating across the board. The continuation of economic weakness outside the U.S. and a drop in Crude prices may keep the Dollar heading higher. Traders should look to the UK today as we have seen particular price volatility in the GBP/USD pair.

EUR - IMF Issues Economic Report with Bleak Outlook

A stark report from the International Monetary Fund released yesterday predicts that all of the major European economies will soon hit a recessionary period. Average growth across the continent may slow to 1.3% this year and decrease to 0.2% in 2009.

With signs of inflation dwindling due to the economic slowdown, the ECB may be in a position to lower interest rates to spur economic growth. This may have a negative impact on the EUR as traders may price in future interest rate cuts, reducing the yield on the EUR. Some economists have estimated the ECB may ease rates by 100 basis points with inflation dropping and the price of Oil steadily declining. The ECB may have room to ease interest rates well into the next year to the level of 2.25%.

The head of the IMF also stated that despite the recent EUR/USD depreciation, the EUR remains overvalued. This statement may have helped to fuel yesterday's 362 point drop for the EUR/USD. Weak Euro-Zone economic data is driving the currency lower to levels not seen in 21 months. The EUR also fell against the JPY to a level not seen since June 2005.

In early morning trading today, the Dollar broke the psychological mark of $1.300. The catalyst pushing the EUR lower is the performance of the Euro-Zone economy. The EUR may have gone from heavily overbought to a relative fair value. Perhaps there may be room for further drops in the EUR/USD.

JPY - JPY Reaches 4-Year High versus the EUR

The Japanese currency surprisingly gained in relation to its counterparts, despite predictions of a recession and a sudden drop in Japan's stocks yesterday. The JPY gained 153 points on the Dollar yesterday and nearly 600 points versus the EUR, reaching a price not seen since April 2004. The large gains were spurred by perceived future cuts to interest rates in the Euro-Zone and deteriorating economies abroad.

What the market is seeing here doesn't represent fundamental data, but a crutch. Worried investors are still moving away from high yielding currencies and risky assets. Investors move out of these riskier positions and are using the JPY as the fall back, fueling demand and appreciating the JPY against its pairs.

Oil - Crude Prices Drop below 70 USD

Investors have seen the price of Oil drop 50% from its July high. Yesterday, Oil prices shed $5 and are currently trading under $70. Prices are steadily declining due to an appreciating Dollar and reduced global demand amid an economic downturn.

The drop in Crude prices will be addressed in OPEC's meeting tomorrow as production cuts are forecasted. Price swings of $5 are not uncommon in these types of market conditions. Crude prices may hold between the $60 to $80 range for the next month or longer.

Technical News

EUR/USD

The pair crossed the key psychological level of 1.3000 yesterday, for the first time since August 2007, further demonstrating how strong the current downtrend is. On the daily chart, the pair is still floating beneath the Bollinger Band's lower border, indicating that the pair might extend its bearish move. Going short with tight stops might be the right choice today.

GBP/USD

The Cable is in the middle of a very intensive downtrend that started a week ago and shows great momentum that on a bigger scale appears to have more room to run. Currently, all oscillators on the hourly chart are pointing down and it seems that going short will be the right choice today.

USD/JPY

The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.

USD/CHF

This pair is still in the midst of a steady uptrend which is not yet showing any sign of leveling out. The RSI and Momentum on the daily chart are still positively sloped indicating that there is still plenty of steam left in this bullish move. Once this pair breaches the 1.1750 level it's likely to make another sharp break upwards.

The Wild Card

Oil

There is still a bearish configuration on the daily chart, indicating that the momentum is still down. The Slow Stochastic flows high supporting the notion that there is still room to run for this trend. In the shorter time frame there is a bullish cross forming on the hourleis indicates that there might be a small bullish correction before the bearish move resumes. Forex traders can maximize profits by selling on highs and taking advantage of a currently bearish trend.

Current Time: 07/23 07:44 GMT
# Time $€£¥ Event Per. Prev. Fore. Act. Imp.
07/23
09:30GBP+ MPC Asset Purchase Facility Votes0-0-9--5
09:30GBP+ MPC Official Bank Rate Votes0-0-9--5
09:30GBP+ BBA Mortgage Approvals 41.8K--3
11:00GBP+ CBI Realized Sales4--3
13:30CAD+ NZD Core Retail Sales m/m0.7%--5
13:30CAD+ Retail Sales m/m1.1%--3
15:00EUR+ Consumer Confidence-7--1
15:30USD+ Crude Oil Inventories-7.5M--3
22:00NZD+ Official Cash Rate3.25%3.25%-5
22:00NZD+ RBNZ Rate Statement***5
23:45NZD+ Trade Balance285M--5
00:50JPY+ Trade Balance-0.86T--3
07/24
02:35JPY+ Flash Manufacturing PMI51.5--1
07:00EUR+ Spanish Unemployment Rate25.9%--3
08:00EUR+ French Flash Manufacturing PMI48.2--5
08:00EUR+ French Flash Services PMI48.2--3
08:30EUR+ German Flash Manufacturing PMI52.0--5
08:30EUR+ German Flash Services PMI54.6--3
09:00EUR+ Flash Manufacturing PMI51.8--3
09:00EUR+ Flash Services PMI52.8--3
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