In Which Direction Will Market Sentiment Pull The Fledgling Dollar?

The Greenback traded close to its lowest mark in one week versus the Euro yesterday as a batch of unplanned news from the US added to bearish behavior for the USD. Responding to a $1 rise in Oil prices along with growing speculation of another month of failing housing sector numbers, investors in the dollar saw just less than 100 points added to the oft traded EUR/USD pair. The USD also lost ground versus the JPY and GBP as the USD/JPY traveled back toward levels of 107 and GBP/USD gained just over 80 points in yesterday’s session. Though many still believe in the USD growing bullishness, it was hard to escape the reality put forth by the White House, that the US economy faces a record $482 Billion deficit. Shortly following the deficit statement, US stock markets took a tumble by close to 250 points and brought the Greenback along for the ride. The severity of the US housing markets has also brought back worries of the credit market, while the seizure of 2 small US banks by regulatory bodies certainly did not help. The Federal Deposit Insurance Corporation (FDIC) closed down 2 west coast banks yesterday as banking defaults prevented them from staying afloat.

In the news yesterday, FOMC member Frederic Mishkin and Treasury Secretary Henry Paulson both spoke. Mishkin delivered little to move the market however; Paulson presented an idea that could prove to be vital to the US economic outlook. Paulson, speaking at a press conference in Washington D.C., entertained the idea of introducing a cover bonds market that would help pull the mortgage funding companies like Freddie Mac and Fannie May out of the mud. A covered Bond is a debt investment backed by cash flows from mortgages or public sector loans. In fact, Paulson’s hawkishness prevented a more significant drop in the USD yesterday and could end up being the catalyst for what could still be a bullish week for the USD.

On tap from the US today, we can expect the release the S&P HPI Composite and Consumer Confidence figures. The S& P Composite measures the change in the price of single-family homes in 20 metropolitan areas and is expected to fall 0.8% more than last month drop of -15.3%. Consumer Confidence is forecasted to fall to 50.0 from the last recording of 50.4. While all indications on the fundamental side point to dollar bearishness, any improvement on the aforementioned numbers could help persuade the market to stay bullish on the greenback. Forex traders should pair Dollar positions with commodities positions as the correlation between USD to Gold and USD to Crude Oil continues to grow.

Will Poor Euro-zone Data Affect the Euro?
The Euro continues to push itself in to uncertain territory amidst poor data from the Euro-Zone. Despite gaining close to 100 points yesterday against the USD, the EUR mainly range traded versus other currencies.

Euro-Zone data is producing some of the worst numbers in over half a decade. German Consumer Confidence Numbers were released yesterday and showed that consumers in the EZ’s largest economy are skeptical about spending in such a volatile market environment these days. Yesterday’s lack of liquidity prevented the Euro from experiencing any major road bump as the Euro-Zone continues to head toward recessionary territory. Concerns are that the Euro-Zone cannot shake the copious amounts of negative data being released on what has become a regular basis lately in Europe, and that such behavior will ultimately prevent the Euro from gaining anymore against the dollar.

With the German Consumer numbers being the sole EZ event yesterday, the negativity was subsided by more bearish USD news. Growing tension in Iran and a string of attacks in Iraq sparked a quick one day rise in Crude Oil prices that sent the popular EUR/USD pair soaring above 1.57.

As we look forward to today, German Preliminary CPI figures are expected to be released to better than usual numbers at 0.5% change since last month. As the lone event form the EZ for today expect a smaller amount of liquidity surrounding EUR crosses. With the outlook of the US still shaky, CPI positivity could help regain even more points from last weeks slide against the Dollar.

Global Stock Markets to Determine JPY Movement
Yesterday saw equity markets falter worldwide, as the JPY directly affected. Despite a ‘heavy’ week of news on tap for the JPY including yesterday, the stock markets have been the major catalyst for movement when discussing JPY crosses. Those crosses were driven lower yesterday in response to a 250 point drop in US markets. The JPY recovered against the dollar yesterday on news of a number slumping month in the US housing sector.

In the overnight Asian session Japan released several key news events which did little to move the market upon release but could prove to be vital to the week ahead. Retail sales returned to surprisingly positive territory to a 0.3% change from the previous month, up 0.6% from initial forecasts. Also improved but still negative were annual Overall Housing Spending numbers, which dropped by 1.8%. The Unemployment Rate was the one grey note as it rose by 0.1% to hit a two year high at 4.1%. It will be interesting to see how the local Japanese data will interact with Equity market movement for the rest of the week, in regards to JPY movement in the Forex market.

Preliminary Industrial Production is the sole news event on tap from Japan today and will likely have little effect on the market as it released at 23:50 GMT. Forex traders invested in JPY related crosses should stay tuned to stock market movement today for indications on positions.

Crude Looks to Stay Stable
Even though demand has been decreasing on record high Oil prices, the Crude staged a late-day rally yesterday, as investors watched mounting geopolitical tensions in oil-rich countries, particularly in Nigeria where a rebel group destroyed oil pipelines in the southern part of the country early Monday.

U.S. crude delivery for September rose $1.47 and settled at $124.73 a barrel on the New York Mercantile Exchange. Prices rose as much as $1.96 a barrel and dipped as much as 63 cents a barrel during morning trading as investors weighed supply concerns with declining demand.

Oil prices climbed to record highs above $147 a barrel earlier this month, but have since fallen more than $22 as reports have indicated that record high prices of crude oil and gas have been motivating consumers to lower their demand.

Increased supplies from Saudi Arabia have already come into the market and the recent softening in prices is a direct fallout of that. Saudi Arabia had announced an increase in production by 700,000 barrels a day from July.

Global Crude Oil prices, which were threatening to breach the $200 a barrel-mark by the year-end, is now likely to stay closer to the current price (between $120 and $130 a barrel).

Technical News

The daily chart shows fresh signs of a bullish move, suggesting that the downtrend has vanished. The hourly chart’s Slow Stochastic also supports this notion indicating that the upwards momentum has more steam in it. Going long with tight stops appears to be the right strategy today.
The 4 hour chart shows that the Cable is going through a choppy sessions with mixed trends for the past 2 weeks. A bearish cross on the 4 hour chart’s Slow Stochastic suggests the origination of a downwards corrective move. Going short appears to be preferable.
An upward movement on the 4 hour chart is running at full steam forward. The distinct bullish channel hasn’t been breached yet, while 108.00 might be the next target price. The daily chart also confirm that notion, therefore going long may be a preferable strategy today.
After peaking at 1.0400 on last Friday, the pair has been going through a moderate bearish correction. A bearish cross on the daily chart’s Slow Stochastic indicates that the downwards momentum is still intact. Going short might be the right choice today.

The Wild Card

Crude Oil
The bearish correction seems to have reached its bottom, as the daily chart is giving clear bullish signals, suggesting that Oil is ready to resume its overall bullish trend. Forex traders may enjoy a great entry price for the upcoming bullish move.

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