USD Losing Strength Ahead of Interest Rate Announcement

After depreciating consistently over the past few weeks, the USD is now traded over 1.29 against the EUR, and over 1.40 against the GBP. This week on Wednesday, at 18:15 GMT, the Federal Reserve will deliver an Interest Rates statement, and is widely expected to leave it on 0.25%. However, Bernanke’s speech from yesterday might hint that a rates hike is no longer taboo. Such decision could create mayhem for the leading currencies, and forex traders must be prepared.

Economic News

USD – USD Propped-Up by this Week’s Bullish Expectations

With a rally in stocks and other equity markets last week, traders witnessed a significant downtrend in USD pairs and crosses. Losing strength to almost all currency rivals, save the JPY, the greenback indeed suffered from this increase in risk appetite. Trading down against the EUR at 1.2926 last Friday, and also returning to the 1.4000 level against the GBP, the short-covering action on the USD inflicted some deep wounds to the American currency.

With few data releases helping or harming the EUR, the USD was likely losing strength from the unwinding of long positions on the Dollar in exchange for higher-yielding assets. In today’s early trading sessions, the USD regained some of its lost momentum and is currently trading at 1.2886 against the EUR.

As European markets come online later on, the increased liquidity may in fact push the USD lower against the EUR as European indicators are forecasting a lack of any significant change, whereas the U.S. government will be releasing figures which are predicted to present relatively bullish results. Under normal circumstances the USD would receive a positive boost, but during these times of recession and financial crisis, positive figures may result in an increase to risk appetite; causing a turn of events similar to those of last week. The USD could turn around from this morning’s gains and test the 1.3100 level by day’s end.

Traders should be watching for today’s release of Treasury International Capital’s (TIC’s) Long Term Purchases report, which is expected to indicate that demand for U.S. long-term securities has increased, most likely leading to a concurrent increase in demand for the USD. As interest in American securities increases, the value of the Dollar rises with it since investors must purchase these securities in USD. Whatever the outcome, today will likely see a sharp volatile movement in the value of the USD’s pairs and crosses.

EUR – EUR Lacks Clear Direction; Will Euro-Zone Confidence Continue Weakening?

After a week of solid gains against many of its currency rivals, the EUR now appears to be leveling off, and in some instances weakening against other currencies. Last week’s strength may actually have been attributed to an increase in risk appetite and therefore an unwinding of safe-haven USD positions, of which the EUR was the beneficiary. With neutral economic data emanating from Europe last week, this may indeed be the case. Ending the week up against the USD at 1.2926, and at 0.9228 against the GBP, the EUR made gains in its tug of war against its primary currency counterparts.

As economic suffering begins to build across Europe, the European Central Bank (ECB) is finding itself under greater pressure to reduce interest rates in an effort to stem the economic slide, as well as prevent a deflationary cycle from forming. With a multitude of countries comprising the European Monetary Union (EMU), it is less likely that further monetary easing can or will take place in the Euro-Zone, but a further reduction of interest rates is possible in the near future. With such a turn of events, the EUR is not likely to regain any mantle of strength in the coming days. As the USD leads the other currencies in making the market, EUR strength will most likely be attributed to an unwinding of Dollar positions, not from any inherent strength in the EUR itself.

Looking ahead this week, traders will see a series of data releases which would be foolish to ignore. Today’s consumer pricing and inflationary information for the region may set the tone for the EUR this week, but the market-maker for this regional currency is likely going to be tomorrow’s release of the ZEW economic sentiment reports from Germany and the broader Euro-Zone regional economy. If consumer confidence continues to decline, traders will likely see a reduction in interest rates happening much quicker, and potentially deeper than expected, and the EUR will continue to be sold off to fund safer investments. Without a strong vote of confidence this week, the EUR may be on the receiving end of a downward slump lasting through Friday.

JPY – Bank of Japan Desires Weaker Yen; Expect Monetary Easing?

After seeing a short rally from sudden USD-weakness, the JPY has now resumed its previous downtrend against many currency rivals. Ending last Friday at 98.01 against the USD and 126.43 against the EUR, the JPY has continued to weaken from the unpleasant economic situation which has been brewing in Japan these last few months. The Bank of Japan (BoJ) is scheduled to discuss another potential interest rate cut later this week, but with the lowest rate worldwide, a further reduction seems counter-productive.

The BoJ has made it clear that a weakened Yen is what they desire as it will help stimulate exports for this heavily trade-dependent nation. With further negative economic data set to be released this week, traders will likely see a continuation in the downtrend of the JPY through Friday.

Crude Oil – Output Cuts Claimed to Produce Results

The Organization of Petroleum Exporting Countries (OPEC) has recently claimed that their previous production cuts have begun to take effect and the price of Crude Oil has continued to hold strength. Finding support in the $40-50 price range, the price for a barrel of Crude Oil has finally stabilized, according to the cartel, and further production cuts will not be necessary since expectations are for demand to begin increasing by 2010.

Various accounts have been given for what a reasonable price for Crude Oil might be, and a few oil ministers from within the cartel are aiming for a price range near $70 a barrel. The expectation is for the price for Crude to hold within the current range until the recession begins to ease and demand picks back up. Once achieved, the price of Oil should climb back towards the $60-70 price range by early 2010. However, without accomplishing an economic turn-around, prices may drop once more and OPEC could consider a further production cut towards the end of this year.

Technical News

On the 4 hour chart the moderate bullish price movement continues within the upwards channel which still has yet to be breached. The hourly chart is also joining that notion with the Slow Stochastic pointing to the continuation of upwards momentum. Next testing point should be around 1.2960. Going long appears to be preferable today.
Since Friday’s trading session the Cable recouped losses, appreciating from 1.3730, up to 1.4063. The Slow Stochastic of the 4 hour chart is showing no crosses in the horizon, and the bullish momentum there appears to be intact as well. Daily chart’s oscillators also support this notion. Placing long positions might be a right choice for today.
The pair is showing local bullish momentum on the 4 hour chart after a very violent drop to the 95.77 level. On the hourly chart however, the pair continues to trade within quite a wide range, while the Bollinger Bands are getting tighter indicating that possible breach out of range might be imminent. By now, it would probably be recommended to stay out of this pair until a strong and distinctive signal will appear
The 4 hour and the daily charts indicating that the bullish trend has not yet said its last word as this currency pair is in the midst of a strong upward trend. However the hourly chart’s RSI and Slow Stochastic indicators are pointing down. A preferable strategy might be waiting for a clearer signal on the hourlies.

The Wild Card

It seems that the bullish momentum is back again as the carry trade pair is heading up with plenty of room to run. All of the technical oscillators on the hourly and the daily charts are giving a bullish signals and this pair’s target today might be the 0.5300 level. This gives forex traders a great opportunity to rejoin the market at an excellent entry price.

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