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Tuesday, 19 Feb 2008
Will the FEDs Cut Again?
U.S. traders were off yesterday celebrating Presidents Day and there was no news or economic data to drive the market. By the end of the trading session, the USD was up 0.4% against the EUR, mainly as a result of position unwinding.
This week, inflation will be in focus as the U.S. consumers expect the rise in food and energy prices. Although the greenback edged higher yesterday, analysts estimate that the U.S. data releases may keep the pressure on the currency this week. Bernanke's remarks and recent economic data have left investors betting on another half percentage point cut at the central bank's March meeting. Futures contracts on the Chicago Board of Trade indicate traders see 74% likelihood the Fed will lower its benchmark rate by 0.5 %point at the next FOMC meeting. The rest of the bets are on a 0.75 % point reduction.
Today, the U.S economic calendar is relatively tame with only the National Association of Home Builders (NAHB) data providing any meaningful guidance to traders. NAHB index is measuring the demand outlook of single-family home builders. Also, during the day, Minneapolis Fed President Stern is scheduled to speak about the U.S. economy at the Financial Planning Association of Minnesota. Traders scrutinize his speeches closely for clues regarding future monetary policy.
Traders may expect little major action in the U.S. currency till tomorrow, when the CPI report, Housing Starts and FOMC Meeting Minutes will be released. Overall, we expect that bearish dollar sentiment will persist during the rest of the week.
With the absence of data coupled with the U.S. holidays, the EUR held broadly in a range yesterday. Overall the EUR/USD traded with a low of 1.4612 and a high of 1.4688 before closing the day at 1.4654.
Meanwhile, there are more comments coming out of the ECB, which confirm the market's belief that the Central Bank is growing less hawkish. The ECB member Liikanen, said that the European growth will likely fall below 2% this year due to weakening sentiment and the ongoing financial turmoil. Currently, the market is pricing in between 50 to 75bp of interest rate easing by the ECB this year.
But the biggest story in the European financial market yesterday was the British Prime Minister's announcement that the government will be temporarily nationalizing Northern Rock, one of the top 5 U.K. mortgage lenders. The decision has triggered a wave of GBP selling. The British Pound dropped to $1.9490 yesterday, from $1.9612 late on Feb. 15. It also fell to the lowest level in two weeks against the EUR.
There is no Euro zone economic data due for release till tomorrow, when we expect German Producer Prices Index. Today, the EUR should continue to gain on speculations that the Fed will probably cut its benchmark rate at the next FOMC Meeting.
The JPY depreciated vs. the USD yesterday as the pair tested offers around the 108.30 level and was supported around the 107.75 level. The Bank of Japan monthly report echoed the same tone held by BoJ Governor Fukui last week. The report talked about the ongoing slowdown in the U.S. economy and its potential impact on the Japanese economy. The JPY also declined against the USD after Japan's former top currency official said the economy may enter a recession for 1 or 2 quarters this year.
Also yesterday, the Tertiary Industry Activity Index deteriorated in the month of December, led by a sharp decline in retail activity.
The Japanese economy continues to be extremely sensitive to global demand and the interest rate policy will remain dormant until the BoJ sees concrete signs of improvement. Ironically, negative news on the global economic front will likely lead to a strengthening of the Japanese currency while positive news will drive the JPY lower as carry trades dominate flows.
Today, the only news to come out of the Japanese financial market is the Monetary Policy Meeting Minutes. The Bank of Japan Meeting Minutes is a detailed record of the bank's Interest Rate meeting held about one month earlier. This indicator is of quite a minor importance, therefore today, most price movement of JPY pegged currencies will be derived from the U.S. and the European financial data.
The pair is showing strong bullish sentiment again, and has made a relatively fast move that topped at 1.4710. The 4 hour chart is bullish and the slow stochastic is pointing to a strong bullish momentum. Next target price is 1.4750.
After several failed attempts to breach through 1.9480, it appears that the cable is showing some bullish signals with increasing momentum. The bullish cross with the positive slope on the 4 hour chart strengthens the notion that a move back to 1.9600 is quite imminent.
The consolidation around the 108.20 level has ended, and the pair is showing strong bearish momentum again. It appears that the bullish breach above the range was not validated, and that range trading might be the name of the game. Taking short term selling positions might be the right move today.
The 4 hour slow stochastic is showing a strong bearish cross, as the pair already started to drop. Both daily and 4 hour chart are showing plenty of room for the bearish trend, and a touch at the 1.0900 might be very possible today.
The Wild Card
The pair has been going through a very strong bearish trend in the past month, and has been showing some consolidation lately. The daily chart is showing a bearish cross on the slow stochastic, and together with the negative slope on the 4 hour one, it could be a great opportunity for forex traders to get in a short position, before momentum increases.