USD Trades Lower on Market Optimism

There were more signs that the U.S. economy was improving, as a string of positive data was released yesterday from the U.S. the most significant was the Chicago PMI, which printed higher-than- expected figures in the month of August. This indicator is a primary gauge of manufacturing sector, acting as the main driver of the U.S. economy. On top of this good news, a rise in demand for U.S. goods from abroad is also likely to help boost the U.S. economy in the coming months.

Economic News

USD – Chicago PMI Data Pushes the USD Lower

Evidence is increasing that the worst of the global recession is passed. Business activity in the U.S., the world’s biggest economy, rose more than economists forecast in August, the Institute for Supply Management-Chicago Inc. said Monday. The Chicago PMI report is further indication that the U.S. economy is starting to improve; the data eased risk aversion among investors analysts said, with positive data negative for the Dollar and Yen.

The USD fell against a basket of currencies due to the decline in U.S. equities, as fears that the recent rally has overheated. This decline was led by the 7% fall in China’s stock market index. As a result, the Dollar was hurt as traders fled to currencies such as the GBP and EUR. The greenback fell by about 50 pips to the 1.4336 level vs. the European currency. Against the British Pound, the Dollar slid by over 50 pips to 1.6283. The USD did make some gains, as the USD/JPY cross rose by 30 pips to the 92.95 level. Note, this is the first time in 3 days that the USD closed higher against the JPY.

Looking ahead to today, there is some pivotal news that is set to be released from the U.S. economy. The ISM Manufacturing PMI and Pending Homes Sales figures are set to be published simultaneously at 14:00 GMT. These results are even more important than usual due to the recent turmoil in equity markets and commodity markets, therefore all eyes are on the Dollar as the U.S. economic situation is set to improve further. It is advised that traders open their USD positions now, as this trading day is set to become very volatile in the coming hours. Furthermore, today’s results are set to drive the forex market for the rest of this week.

EUR – EUR Rises as Inflation Eyes Positive Territory

The EUR’s experience with negative inflation may be coming to an end very soon, as yesterday’s figures showed a smaller-than-forecast yearly fall in prices in the Euro-Zone in August. The CPI Flash Estimate showed that prices were only -0.2% lower than August 2008. However, in July the figure was -0.7%. The deflation in the Euro-Zone has been owed to a drop in consumer goods prices, especially the price of Oil.
Monday’s figures indicate that inflation may be positive again by the end of this month.

The European currency rose against most of its major currency crosses in yesterday’s trading. Starting with the GBP, it rose only 5 pips to the 0.8802 level. This comes as the pair has started to see more bearishness recently. Yesterday’s behavior within the pair may be largely owed to the lack of volume in some GBP pair, due to the bank holiday in Britain. With regards to the EUR/USD pair, the European currency rose 50 pips to the 1.4336 level. The GBP/JPY cross jumped by 100 pips to the 151.50 level.

Today, the news coming from the Euro-Zone is also set to be a driving force in helping determine the EUR’s main crosses, as mid-week trading approaches. There is the German Retail Sales at 06:00 GMT and the Unemployment Rate at 09:00 GMT. Data form Britain is also set to help determine the strength of both the EUR and GBP today, such as the Mortgage Approvals and Manufacturing PMI figures. So if you want to make some high returns today, open large positions in EUR and GBP as soon as possible.

JPY – Yen Falls on All Fronts

The Yen slipped on Monday, as a slump in global equities led by the U.S. and China reignited fears about Japan’s fragile economy. It seems the recent lift from the landslide election victory of the Democratic Party in Japan’s election (DPJ) failed to help the Japanese currency yesterday. The Japanese currency fell against the USD by 30 pips. It also fell vs. the GBP and EUR.

It seems in the longer term, however, the important election of the DPJ may help the JPY if it sticks with its election promise to increase consumer spending, which in turn will push Japan back to positive inflation. Additionally, the Yen could also gain if the DPJ sticks to its other pre-election promises, such as reversing the current purchasing of U.S. Dollar based debt.

OIL – Oil Plummets Amid Global Equity Slump

Crude Oil prices plummeted by nearly $3 to $69.86, which is the biggest drop in 2 weeks. This comes about as a 7% dive in china’s main stock index led to a bearish global equity market yesterday. This was initially sparked by concerns about a slowdown in lending that is likely to negatively impact the global economic recovery in China, which is the second largest energy consumer.

Crude’s dive was also owed to fears that Japan’s economy is destabilizing, as housing and other important data showed that Japan’s economy is still very volatile. Therefore, this is important as Japan is the world’s second largest Crude Oil consumer. Traders are advised to follow the next OPEC meeting on September 9th, which will be crucial in determining future Crude prices.

Technical News

The price appears to be floating in the over-bought territory on the daily chart’s RSI, indicating a downward correction may occur later today. However, the hourly chart’s Slow Stochastic indicates a recent bullish cross, signaling a possible continuation of the upward movement. In the short-term traders however may expect a downward correction, but longer-term traders may want to maintain their long positions today.
Most oscillators display this pair floating in neutral territory at the moment, indicating a lack of direction. The hourly chart’s Slow Stochastic indicates that the price may hit a bullish cross in the near future, but the weekly chart’s Momentum oscillator is still showing steep downward pressure. Waiting for a clearer signal might be the right strategy today.
It appears that little by little that pair has lost strength over the past few days, as it is now testing the 92.80 level. A bearish cross on the hourly chart’s Slow Stochastic implies that the down trend could even deepen today. Going short with tight stops could be a good strategy today.
The sharp bearish move that took place during the past couple of days seems to have more steam in it. The RSI on the hourly charts is crossed above the 40 line, suggesting that the pair may fall further. The bearish move on the daily’s Slow Stochastic also supports this notion. Next target could be 1.0490.

The Wild Card

It appears a bearish cross has recently formed on the 4-hour chart’s Slow Stochastic, indicating that this pair’s recent downward correction may still have some steam. Now would be a great time for forex traders to join this recent run and capture the remaining profits before the rising trend continues.

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