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Thursday, 1 May 2008
USD Gradually Ascending Ahead of Tomorrow's NFP.
The USD reversed its gains vs. the EUR yesterday as traders concluded that the FOMC Statement that came right after its Interest Rate policy meeting left the door opened for further rate reductions. Shortly after the Interest Rate announcement, the greenback dropped 0.4% to a low rate of 1.5637. With the threat of growth cooling further, the FOMC trimmed the Interest Rate by 25bp to 2% and stated that the financial markets remain under considerable stress.
The greenback has been receiving support after the recent stabilization of the financial markets in the US. Although the sentiment towards the dollar has significantly improved after yesterday's various positive US data, the Fed members still continue to express their concerns regarding the growing inflation in domestic markets. Tight credit conditions and the deepening housing contraction are likely to continue, weighing on US economic growth over the next few quarters. However, despite these cautious projections for economic activity, the market took the quarter point cut in stride with confidence that the Fed would now turn to a neutral policy stance to monitor inflation and financial market conditions.
Looking ahead to today, after the effect caused by the Interest Rate reduction, there is more intriguing data scheduled to come out. During the day, traders will primarily be concentrated on the ISM Manufacturing Index - a leading indicator of overall economic performance. This indicator measures the activity level of purchasing managers in the manufacturing sector and reflects the inflation experienced by them.
A lower than forecasted print should produce bearish momentum for the USD, as it would be clear proof that the world's largest economy is still in a stage of contraction. On the other hand, a reading in line or above expectations isn't likely to spark much reaction as traders will be anxiously waiting for Friday's Nonfarm Employment Change.
Yesterday the EUR experienced a rising trend against most of its currency rivals. Although it saw bullish trends vs. the USD and the JPY, it still depreciated against the GBP. The main reason for the EUR's bullish trend was yesterday's rate cut in the U.S. The U.S. rate cut led to a strong increment vs. the USD, moreover strengthening the EUR in other pairs. Likewise, the Consumer Price Index Flash Estimate expressed a slight lowering of the inflation rate, which should have had a negative influence against the EUR. In addition, the European Central Bank President Trichet, spoke yesterday stating that for the first quarter of 2008 the Euro-zone economy appeared to be strong and healthy, and declared that he expects the economy to be "reasonably resilient" for the next few months. He continued saying that the International Monetary Fund is forecasting a 1.4% growth for the Euro-zone this year. He ended his speech with dismissing the proposition of a future interest rate change, saying that the steady 4.00% interest rate enables the ECB to control inflation.
Today, the first of May, is the European Labor Day. This will bring the European business activity to a minimum. Therefore, very low liquidity is expected today. Traders should keep their eyes open for developments from the US. These developments should be the main reason in determining the EUR's development today.
Yesterday, the Yen was extremely volatile during trading hours versus its major currency pairs. Although the Yen experienced a sharp decline and rise during the day, ultimately it finished near the opening rate. Yesterday some crucial Japanese data was announced.
The data began with an Interest Rate Announcement, which remains the lowest in the industrial world, setting it at 0.5%. Later on, The Bank of Japan (BoJ) published its Monthly Report. In the report, the BoJ stated that as a result of uncertainties in economic activity and prices, they will not predetermine the direction of future monetary policy. Furthermore, on condition that the BoJ's basic economic scenario will remain intact, they have agreed to adjust the level of interest rate in accordance to improvements in the economic and price developments. Even though the report did include the possibility of economic instability in the near future; the report ended with the expectation of gradual yet steady recovery for the Japanese economy. The BoJ continued a assess that growth will reach 1.7% for the coming fiscal year. The last influencing economic news was a speech by Boj's Governor Shirakawa. In his speech the governor stated that at present he is not inclined to adjust Japan's interest rate level. Saying that the BoJ first must prudently examine the income data, before it can decide which policy direction should be taken.
As for today, there is no significant economic data expected to be published. Investors should mainly determine their acquisitions according to the USD developments. Given that the Euro-zone is on holiday, US influence should increase over the JPY.
After several days of drops, the pair is showing a strong bullish signal on the daily chart. The daily Slow Stochastic is showing a bullish cross, and the 4 hour chart is supporting the bullish notion. There seems to be fresh reversal momentum that might take the pair back to the 1.5720 level.
There is a bearish channel forming on the 4 hour chart, as the cable now attempts to breach through the upper level. If the breach validates, there could be much stronger bullish momentum created post breach. The 4 hour chart indicates that the possible breach might be quite imminent.
The narrowing bullish channel continues, as the pair now floats near the bottom barrier of it. 103.10 should be a very strong support and a failed breach should probably stir fresh bullish momentum. Traders should wait for a dip around that support level before considering a long position.
The daily chart is showing flat consolidation around the 1.350 level with no distinct price direction. The 4 hour chart is showing mixed signals, and the daily chart is dwelling in neutral territory. Traders are advised to wait for a clear signal on any direction or keep out of that one today.
The Wild Card
The daily chart is showing that the bearish breach through the channel has been validated, and that the bearish momentum created by that breach might have enough steam to take Crude Oil back to the 112.00 zone before the weekend. Forex traders have a great opportunity to take advantage of a very strong technical breach with high profit potential.