ECB Surprises the Market and Traders Anticipate Non-Farm Payrolls

A surprise 25 point basis point Interest Rate cut by the ECB is being digested by the currency markets. But traders won’t have much time to pause as the high impact Non-Farm Employment numbers are released later today.

Economic News

USD – USD Weakens from Negative U.S. Data and Positive EUR News

The USD experienced a rather rough day of trading yesterday, with a substantial loss to the EUR and GBP. After the European Central Bank (ECB) failed to reduce Interest Rates as deep as forecasted, there was a modest rebound in the value of the EUR against its primary currency pair, the U.S. Dollar. Ending Thursday at 1.3456 against the EUR, and 1.4731 against the GBP, the greenback has seen better days.

Two rather important currency valuating events have taken place over the previous few weeks. The first was the announcement of quantitative easing by the U.S. government, an event which dropped the value of the USD to the 1.3700 price level against the EUR. This loss was held in check, however, as most investors anticipated a similar move by the ECB. As this was not forthcoming this week, the second event was a renewed sell-off of USD in exchange for higher yielding assets on Wall Street as well as a buy-up of more unique currencies as a hedge against the perceived future weakness of the current safe-haven currencies.

As this week comes to an end, there is still room for a market shock during Friday’s trading hours. With a calendar chalk full of important events, traders are highly advised to participate in the heavy news-trading day ahead of them. The U.S. government will be releasing its monthly Non-Farm Employment Change report at 12:30 GMT alongside the announcement of the U.S. unemployment rate. A disappointing payrolls report could send the EUR/USD above the 1.3500 resistance level tested in the early hours of the Japanese trading session.

Later in the day, Federal Reserve Board Chairman Ben Bernanke will be delivering a speech titled “The Fed’s Balance Sheet” at the Richmond Federal Reserve Bank’s Third Annual Credit Market symposium. Traders often use Bernanke’s testimonies and speeches to speculate about future monetary policy decisions by the Fed, generating high market volatility during these events.

EUR – EUR Gains Strength as Risk Appetite Increases

The EUR gained momentum throughout today’s trading hours as the European Central Bank (ECB) left room for future monetary policy adjustments by only reducing Interest Rates by a 25 basis points, from 1.50% to 1.25%, yesterday. Forecasts were for a reduction of half a percentage point in expectation of the ECB taking quantitative easing measures similar to those in the United States. As this was not yet forthcoming, the EUR has rebounded slightly to the 1.34 price level against the USD.

When the United States announced its plans for quantitative easing, there was a heavy sell-off of the USD, but the losses the greenback experienced to the EUR were held in check by the assumption that the ECB would follow the States with an announcement of a similar initiative. Now that the ECB has rejected the notion of deep rate cuts followed by quantitative easing, at least for the time being, the sell-off of USD, the purchase of EUR, and the increase in risk appetite have wrought havoc in the forex market in the form of heavy volatility. Those who benefited by going long on the Dollar throughout these past few months may want to consider changing tactics for the time being.

The British Pound also made moderate gains, at least against the USD, as some housing data released yesterday generated a stronger movement towards less liquid assets and a short-term rebound in confidence. Following tomorrow’s release of inflationary data from Europe and Britain, traders will get a glimpse into what may be occurring at the start of next week. The Pound could continue its recent bullish run against the EUR below the 0.9100 mark.

JPY – Japanese Yen Continues to Deteriorate

The Japanese Yen has seen better days. Over the past week this island economy’s currency has consistently depreciated against the majors, losing considerably against the USD and EUR. The level of this depreciation does not appear to have any stops in the making. Japan has maintained a posture of weakening its currency to boost exports, but the added weight of an unwinding of JPY safe-haven trades may have pushed its value lower than anticipated.

The resultant free-fall in the value of the JPY has begun to shake the confidence which many investors had in the island economy and expectations are now sliding further into the red for the economy’s recovery. With little economic news being released by Japan, the end of this week’s trading will likely see a continuation of this falling trend in JPY crosses. Against the USD, the JPY could finally settle above the 100.00 Yen level today.

OIL – Crude Oil Prices Stabilizing as Dollar Relationship becomes More Solid

The price of Crude Oil has become much more predictable this past week. With a sharp appreciation following some negative U.S. data, the value of Crude then continued to sink back below $50 a barrel. However, as the USD weakens once more, the price of Crude has once again made a jump in the direction of the mid-$50 price range. Crude Oil’s value has begun to react much more realistically to the value of the Dollar; this in turn brings a level of stability to Oil trading in the commodities market, which traders can benefit from greatly.

With Crude Oil Inventories falling slightly this past month, there is a perception that demand has slightly increased in the short-term, while long-term demand remains negative. As the Dollar continues to weaken, traders will most likely see the value of Crude Oil climb back towards $55 a barrel through next week, unless the Dollar gains back its recent losses.

Technical News

The pair failed to break the resistance level of 1.3500 earlier today and now trades near the 1.3410 mark. The 4-hour chart is showing a bearish cross on the Slow Stochastic Oscillator and the pair’s RSI is currently floating in the overbought region. This signals downward movement may take place later today. Traders today may look to short this pair.
The 4-hour chart has the Cable floating in overbought territory on the Relative Strength Index and a bearish cross on the Slow Stochastic, signaling potential depreciation of the pair. The hourly chart currently shows the pair’s Bollinger Bands tightening, signaling a violent breach is possible. Placing short positions might be a good strategy for the day.
This pair has experienced a bullish trend the past 12 days and may be due for a correction. The daily chart shows a bearish cross forming on the Slow Stochastic with the pair trading in overbought territory on the RSI. There may be potential for a downward price movement. The 4-hour chart also has the RSI trading in overbought territory, and the Bollinger Bands on the hourly chart appear to be tightening, an indicator that a breach of the lower border is possible. Going short may be the preferable strategy today.
The range trading on the 4-hour chart continues as the pair has not make a significant move in either direction. The RSI is currently floating in neutral territory and the Slow Stochastic is in the middle zone. However, the hourly chart’s Bollinger bands are currently tightening, signaling a violent breach may be imminent. Traders may want to wait for the breach then swing.

The Wild Card

Crude Oil
Yesterday’s price spike may have left the commodity in overbought territory. The 4-hour chart currently shows the RSI floating in the overbought zone and a bearish cross is visible on the pair’s Slow Stochastic Oscillator. This may give forex traders a good opportunity to go short on Crude Oil today.

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