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Friday, 22 Feb 2008
Will the US Economy face further setbacks?
The USD fell yesterday to 2 week lows against the EUR as news of a slump in manufacturing in the U.S. region fanned recession fears.
Yesterday's Philadelphia Fed report unexpectedly dropped to a 6 year low of -24.0 from -20.9, reflecting that the impact of the credit crunch is spilling over to the manufacturing sector, triggering market participants to look for another aggressive rate cut by the Fed.
Many market players expect the Fed to slash overnight rates by another 50 basis points at its next meeting in March to 2.50 %, following an unusually aggressive 125 basis points of cuts in January to help fend off a recession
Interest Rate futures markets have almost fully priced in another 0.5 percentage point Interest Rate reduction at the Fed's March policy meeting, up from an 82% chance seen before the sharp fall in the Philadelphia Federal Reserve's business index.
Recently, the Fed stressed that it was worried the U.S. economy would face further setbacks even after a series of aggressive rate cuts and sharply lowered its forecast for U.S. growth in 2008.
Indeed, the increasing turmoil in the financial and housing sector continuing to add mounting pressures to the struggling economy raising concerns that the U.S. will ultimately face a recession. The labor market also lowered the outlook for the US as Continuing Claims increased to 2784K amid a minor decline in Initial Jobless Claims.
The U.S. economic calendar posts no significant events today as the main focus regarding the USD will be the Dallas Fed President Fisher Speech. Dallas Federal Reserve President and FOMC voting member Richard Fisher will speak about the U.S. economy. Audience questions expected. FOMC voting members are responsible for setting the nation's short term interest rate, so traders scrutinize their speeches closely for clues regarding future monetary policy.
Yesterday, the EUR hit a 2 week high, rising above 1.48 level against the fading greenback. The European currency surged after yesterday's U.S. Philadelphia Fed report printed much below expectations at -24.0.
The EUR was also pushed higher by the GBP rally against the USD. Yesterday, the GBP added another 270 pips through a one-day trading session against the USD. The Cable appreciated as a result of the UK Retail Sales that printed at 0.8%, much above analyst's expectations.
With the U.S. economy teetering on the verge of economic contraction and possibly even a recession, many market participants are waiting to see whether EUR can avoid the pull of its largest trade partner. Investors are scaling back expectations for the ECB rate cuts this year. Futures market are now pricing in only a 1-in-4 chance of a rate cut from the current 4%.
Today, our attention will be mainly focused on the Euro zone PMI and New Orders data, along with the Canadian Retail Sales figures. It will be crucial for traders to identify how the preceding economic indicators from Europe and the U.K. will affect the 13 Nation currency.
Yesterday, the JPY became a spectator along with most currencies to the tumbling of the US dollar. After several weeks of avoiding negative economic data, the greenback has now taken a freefall against every major currency. USD/JPY indices fell nearly 100 pips yesterday, before making a slight recovery in early morning trading on Friday. The slight recovery came just around the same time that BOJ Governor Fukui voiced his concerns over the wariness of the Japanese economy due to its close relationship to the dollar.
Fukui touched upon the growing risks in the US economy and the volatility in financial markets across the board. Fukui specified that 'A slowdown of the US economy is intensifying, while global financial and capital markets continue to be unstable.'
It is of the utmost importance to for the JPY if it looks to thrive, that the world economy provides a stable environment for the low yielding currency. As Japan is now suffering a bit from a slowing housing market, Fukui stated that without the return of investor confidence, Japan is willing to make 'appropriate policy decisions' regarding its currency.
Today there are no Japanese economic events on tap.
The 4 hour chart indicates on an upcoming bullish trend when the long term Moving Average (Weighted 21) crossed by a bullish bar. Additionally the ADX (Average Directional Movement) also strengthens our opinion while the DI+ is on its way crossing the DI- from below which is considered a bullish signal. Going long seems to be preferable.
On the 4 H chart, a rising wedge (bullish) is forming which may imply a continuation of the bullish carry trade, it is recommended to time the entrance to the market with short term charts, 1.9560 seems like a strong entry point. At the moment GPB USD is being traded around 1.9550 to 1.9720 range. The volatility is low; we should expect to see also today a bullish pressure on the GBP. The uptrend should continue on 1.9740 resistances.
The pair is showing a very strong bearish momentum that appears to be overlooking the normal price movement proportions, and is now trading at the impressive 107.21 level. The direction appears to be down, as both RSI and slow stochastic strengthen the bearish notion. Going short with tight stops might be preferable today.
After touching a base at 1.0865, the pair now consolidates a bit higher at 1.0900. All oscillators show that the bearish momentum will probably continue, and that a breach through the next key level of 1.0750 is quite imminent. If the key support level will hold, we might see a correction back to the 1.1050 levels.
The Wild Card
The 4 hour chart implies on an upcoming bearish trend as the Slow Stochastic is crossed at 78 and has a negative slope, however we need to pay attention to the current 4 hour bar, when a positive bar may indicate an upcoming bullish trend and negative bar will imply on a range trading. Forex traders need to be aware during the next 4 hours where the market is headed and to take action.
|18:06||USD||10-y Bond Auction||2.75|2.7||*||-|
|19:00||USD||Federal Budget Balance||-91.6B||-154.6B||-|
|20:00||NZD||Official Cash Rate||2.50%||2.50%||-|
|20:00||NZD||RBNZ Press Conference||*||*||*|
|20:00||NZD||RBNZ Rate Statement||*||*||*|
|20:00||NZD||RBNZ Monetary Policy Statement||*||*||*|
|00:00||AUD||MI Inflation Expectations||1.9%||*||-|
|08:30||CHF||SNB Monetary Policy Assessment||*||*||*|
|09:00||CHF||SNB Press Conference||*||*||*|
|09:00||EUR||ECB Monthly Bulletin||*||*||*|
|10:00||GBP||CB Leading Index||m/m||1.5%||-||-|
|13:30||CAD||Capacity Utilization Rate||80.6%||81.1%||-|
|13:30||USD||NZD Core Retail Sales||m/m||0.2%||0.2%||-|