Bernanke Speech to Impact Dollar

The Dollar is likely to go volatile during and following the speech by the U.S. Federal Reserve Chairman Ben Bernanke today at 12:30 GMT. Meanwhile, forex traders are advised to take positions on trades, as a string of data releases coming out of Japan, Britain, and the Euro-Zone are likely to affect the greenback’s main currency crosses.

Economic News

USD – Dollar Advances on Deepening Global Recession

The Dollar rose against most of its major currency pairs on Monday. This comes about as falling global equity markets and economic deterioration in Japan and Europe, which are more serious than the slowdown in the U.S., have boosted safe-haven demand for the U.S currency. Nevertheless, the U.S. has also released gloomy economic data. Last Friday’s report showed that the U.S. unemployment rate rose to a high of 8.1% in February, as employers cut 651,000 jobs. This reveals that the U.S. has the highest unemployment rate since 1983. Analysts expected weak figures from the U.S. to lead market participants to take positions against the USD in Monday’s trading. However, in many respects, much the opposite has happened.

In late afternoon trading, the USD was up 0.4% against the Yen at 98.78, and ended yesterday’s session up over 90 pips at the 98.94 level. Against the EUR the Dollar fluctuated between gains and losses, finally by settling virtually unchanged at 1.2674. The Dollar’s biggest gains came against Sterling, which fell to 1.3740, the lowest level since Jan. 26th. The currency cross ended yesterday’s session with the GBP down nearly 300 pips against the greenback at the 1.3843 level.

Analysts predict that the Pound is likely to continue to remain vulnerable to the woes of the Britain’s financial sector as investors fear more gloom, despite massive government capital injections and guarantees. Meanwhile, the USD is likely to strengthen further against the JPY, as the deepening downturn in Japan has taken the lure off the Japanese currency as a safe-haven in recent weeks. A number of analysts hold the opinion that intensified worries over grim Japanese data might take the Dollar back within sight of the key 100 Yen mark.

Looking ahead to today, there are 2 data releases that may help determine the Dollar’s strength in late trading today. These are the IBD/TIPP Economic Optimism and Whole Inventories figures both at 14:00 GMT. The thing that is likely to impact the Dollar the most is U.S. Federal Reserve Chairman Ben Bernanke’s speech about the state of the U.S. economy at 12:30 GMT. Forex traders are also advised to follow economic news events coming out of the Euro-Zone, Japan, and Britain, as these are likely to help determine the Dollar’s main currency crosses by the end of today’s trading.

EUR – Pound Crashes to a 6 Week Low vs. the U.S Currency

The Pound dropped to a record low against the Dollar yesterday, and also weakened against the EUR on growing concerns about the outlook of the British banking sector.
The GBP was also hit as the Bank of England (BoE) this week will begin to implement its buying of 75 billion sterling worth of assets to boost the money supply, analysts said. The (BoE) said on March 5 that it plans to buy 75 billion pounds of gilts and corporate debt funded by new money in the next three months as it tries to bring down Interest Rates and pull the economy out of its first recession in 17 years.

The British currency fell 2% yesterday against the USD to $1.3843 from $1.4123. Against the EUR, it declined 1.8% to 0.9151 from 0.8970. It also fell 1.3% vs. the Yen to 137.03 from 1.3847. Worries amongst investors were intensified yesterday after Lloyds Banking Group; the biggest mortgage lender said over the weekend that the British government would get a stake of up to 77% in the bank after agreeing to underwrite 260 billion pounds of risky assets.

Market players expect the Sterling to weaken further, in line with medium-term monetary and fiscal realities. Therefore investors should buy the EUR against the Pound following the Bank of England’s decision. As the British Pound continues to persistently sell off on each and every negative news flow from British banks, it might drop vs. the USD to as low as the 1.3650 level in the coming days.

The EUR may also make losses against the Dollar, and trade at the $1.2500 by week’s end as European finance ministers resist doing more to boost their economies. This is even as the World Bank forecasts the biggest global recession since World War II. The European Central Bank (ECB) has already reduced its main refinancing Rate last week to 1.5%, and ECB President Jean-Claude Trichet stated at a press conference in Basel, Switzerland yesterday the world may be approaching a turning point, and that further measures taken by central banks and governments are likely to stimulate economic growth.

JPY – Yen Slides on Weakening Economy

The Yen fell broadly on Monday on speculation economic conditions in Japan are deteriorating due to the global recession, thus reducing the appeal of the Japanese currency. The JPY declined against most of its major currency pairs after a Cabinet Office report prediction showed that the leading index of business conditions fell to 77.4 in January from 80 in December. Japan fell into its first current account deficit in 13 years in January as the global recession crushed export demand and income from overseas investment. Making the situation worse, Japanese policy makers have been slow to respond to deteriorating economic conditions, denting investors’ confidence in the country’s ability to tackle the economic crisis.

The JPY dropped to 125.45 per EUR from 124.23 yesterday, and fell to 98.94 versus the Dollar from 98.02. Analysts say that the incoming data is likely to illustrate the vulnerability of the Japanese economy, and therefore the JPY is likely to remain weak, particularly as we head into end of the fiscal year. Also, the Yen is likely to weaken further since the Japanese authorities that a weak Yen is their intention. The Yen has slipped 11% since a 13 year peak against the Dollar in January as Japan’s economy grapples with diving exports and its worst recession of the postwar era. Due to Japan’s poor economic data, and the fact that the political situation remain uncertain, some investors predict a possibility of the JPY testing 100 level per Dollar very shortly.

OIL – Oil Prices Eye $50 a Barrel

Crude Oil prices jumped more than 3% to $47 a barrel yesterday on the news of Chinese vessels harassing a U.S. Navy ship in the South China Sea. The naval incident on Sunday, between the United States and China, the world’s top Oil consumers, has boosted geopolitical tensions, adding to the pressure of a possible deeper production cuts by the Organization of Petroleum Exporting Countries (OPEC). The OPEC cartel agreed on a series of deep output cuts last year in an effort to stem the fall in prices, and next meets on February 15 to set output policy again. The Organization has implemented a reduction in output of 4.2 million barrels a day since September, equivalent to about 5% of global Oil demand.

OPEC Secretary General Abdalla el-Badri said on Monday that Oil prices at about $40 a barrel are not suitable, because this price level would not guarantee investment in future capacity beyond 2013. He also stated that the producers’ group would study all options when ministers meet Sunday, though he declined to say whether a further production cut was being considered. Analysts forecast that in case OPEC decides to cut its production by 1 million barrels a day at its meeting, Crude Oil is likely to rise above $50 a barrel in the 2nd quarter of 2009.

Technical News

A bearish cross has formed on the hourly chart, indicating a potential downward correction from the appreciation the pair has experienced today. The price of this pair also appears to be moving along the upper border of the daily chart’s Bollinger Bands, signaling downward pressure may be applied later on today. Going short with tight stops may be the right trade.
The 4-hour chart shows a bullish cross has formed, indicating a potential upward correction. This is supported by the chart’s RSI which appears to be floating in the over-bought territory. Selling the pair may be the right play for short term traders. However the daily chart shows a violent breach of the lower Bollinger Band, signaling a possible upward movement. The daily chart also shows the pair trading in the oversold territory on the RSI. Traders who are bullish on the Pound may like this longer term strategy.
After trading near the 99.00 resistance level, the pair is experiencing some downward pressure. A bearish cross has formed on the 4-hour chart’s Slow Stochastic oscillator. The chart also shows the pair trading in the overbought region on the RSI. This indicates the potential for a downward price correction. The trading strategy is also supported as the daily chart’s RSI showing the pair trading in the over bought region. Going short may be the right strategy for today.
The pair is exhibiting strong short term bullish signals. The hourly chart shows both a bullish cross has formed on the Slow Stochastic and the pair is trading in the oversold region of the RSI. However, almost all other oscillators are stuck in neutral territory, signaling that this pair may be less volatile than expected. Going long with tight stops might be the right strategy today.

The Wild Card

We can see from the 4-hour chart that the pair may be oversold. The price of this pair appears to be floating in the over-bought territory on the chart’s RSI and there appears to be a bearish cross on the Slow Stochastic, indicating a downward correction may occur soon. The pair has also made a violent breach its upper Bollinger Band. This may be a good opportunity for forex traders to go short today.

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