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Monday, 4 Feb 2008
Will the Greenback Maintain It's Recovery?
After a week full of mixed U.S. economic data, a steady stream of negative news from the U.S. housing sector and even after the reduction of the interest rate, the greenback is only marginally lower.
Friday's dismal U.S. Non Farm Payrolls report sent the USD near record-lows against the EUR. The highly-anticipated NFP report showed that employers shed 17K jobs through the month of January - the first negative figure in 4 years.
However, an impressive recovery eventually left the USD slightly higher through the late Friday New York trading session. The U.S. currency rose against the EUR after a report showing the U.S. manufacturing sector expanded in January, helping the greenback to recover from news of the contraction in the labor market.
Nonetheless, the overall U.S. economy is cooling. The loss of 17K of jobs, as was reflected by the NFP report, makes it difficult to argue that the U.S. economy is not already in a recession. The forecast is that the Federal Reserve will need to continue to lower interest rates and unless there is a strong rebound in job growth during this month, it is realistic to expect an additional 0.25% point rate cut somewhere in the next 2 months.
Today the most significant news to come out of the U.S. will be the Factory Orders figures. The figure is expected to release at 2.3%, almost twice higher than in the prior month. During the week, traders will also closely follow the figures of the Nonfarm Productivity index as well as Unemployment Claims and the Pending Home Sales indices.
It appears that the negative US releases will cause the greenback to continue its bearishness, at least until a spur of positive releases will hit the board.
During the previous week European economic data was stronger than expected and the U.S. data was weak, but still the EUR failed to close above 1.49. Last Friday, the EUR fell to $1.4805, down 0.4% from its mid-week trading levels, reversing course after touching a two-month high of $1.4952 earlier in the session.
While the Fed cuts the rate twice in 9 days, the ECB continues to dwell on inflation keeping its benchmark rate unchanged at a 7 year high of 4%. On Feb. 7th, ECB officials will be meeting to decide on interest rates and even though rates are expected to be left unchanged for the 8th consecutive month, all traders should keep an eye on the comments made by ECB President Trichet at the accompanying press conference.
From a strategic point of view, the medium-term outlook continues to be dominated primarily by the deterioration of the macroeconomic environment and the flow of disappointing news. Analysts predict that the worsening U.S. economy will likely be the main factor in the currency market in the months ahead. As conditions currently stand, the EUR seems destined for a further short-term correction before making another substantive run at the $1.5000 mark.
The JPY was slightly down in the early Monday session, trading at 106.90 against the USD and continuing to move in lock-step with equity markets.
The coming week holds at least a few indicators of interest. The preliminary Leading Economic Index for December will be posted on Wednesday. This indicator has been bouncing off its record lows over the past few months, so a notable print may be in order. On the following day, the Machine Tool Orders figure will define expectations for foreign demand and shipments. Finally, Friday brings the Economy Watchers Current survey. This indicator measures the current mood of businesses that directly service consumers and isn't considered to be a big price mover, yet it holds considerable potential nonetheless.
The pair is starting to move back up, after a choppy session on Friday, and a small correction afterwards. The 4 Hour Slow Stochastic crossed at 13 and is supported by the RSI which shows a positive slope. The momentum is bullish, and the next target price appears to be 1.4900.
The 4 Hour Slow Stochastic crossed at 8 implying an upcoming bullish trend with an initial target price of 1.9801. Although the daily momentum is bullish, the hourly momentum is starting to form. Forex traders should wait for Momentum and RSI to have a positive slope before initiating any action and going long.
A slightly bearish narrow channel is forming on the 4 Hour chart as the next target price is located at 106.16, in case of a breach through the bottom barrier, 105.53 will be the next target price. There is still a possibility of a bullish breach as well, so a preferable strategy could be to wait for a clear signal before entering the market.
There is a bearish cross forming on the slow stochastic of the 4 hour chart. In addition we see that there are three consecutive doji bars, which indicates that the bearish break might be quite imminent. Going short appears to be the right direction today.
The Wild Card
Gold has been on a sharp rise during the last week and this trend is expected to continue in the short term. The bullish signal is still strong; however there might be short term corrections during the uptrend. Forex traders can maximize profits by buying on a dip and taking advantage of a sharp bullish trend with a relatively good entry price.