The USD Benefits as Wall Street Slides

The greenback firmed on Tuesday as share prices fell, prompting investors to shed perceived riskier currencies. Despite better than expected numbers from the Institute for Supply Management, shares on Wall Street showed only muted enthusiasm to the data and quickly lost ground, lifting the U.S dollar, which has tended to be used as a safe haven against losses in equities. Ahead of the U.S. jobs data later today, traders said players were anxious about any negative surprises. As the market has become less sensitive to positive surprises from the U.S economic data, the effect of any weak figures would be bigger than the effect of any positive numbers.

Economic News

USD – Dollar Rises on Optimistic Manufacturing Data

The U.S dollar rose against most of its major currency pairs yesterday as sharp losses in global stock markets offset stronger-than-expected U.S. manufacturing data and boosted the greenback’s safe-haven appeal. As a result, the USD finished yesterday trading session 150 pips higher against the EUR at the1.4216 level. The greenback also saw bullishness against the GBP and closed at 1.6155.

The main factors effecting Dollar volatility yesterday were the releases of optimistic U.S manufacturing data and Pending Home Sales figures. The U.S. manufacturing sector expanded in August for the first time in 19 months, while home sales contract hit a two-year high in July, helping lead the economy out of the worst recession and thus boosted the demand for the Dollar. Factories and builders, which have accounted for half of all the jobs lost since the recession began in December 2007, may keep growing in coming months as sales rise.

Traders will be keeping a close eye on U.S. Non-Farm Employment Change data due at 12:15 GMT, which is expected to decrease to -250K from -371k. Special attention should also be given to the Crude Oil inventory which is expected to decrease from previous reading. Investors pay close attention to this figure as it has a strong correlation with the value of the U.S. Dollar.

EUR – EUR Erases Gains After High Jobless Figures

The EUR was little changed, erasing earlier gains, after figures showing Europe’s manufacturing industry continued to contract in August stoked investor concern that the global recession has further to run. The EUR fell against the USD, pushing the oft-traded currency pair to 1.4220. Despite positive data on Tuesday that showed Euro-Zone purchasing managers’ index (PMI) rise and German unemployment unexpectedly fell in August, the EUR failed to make headway on the data as falls in equities weighed.

The Sterling erased its early gains against the U.S dollar and the EUR after an unexpected dip in UK manufacturing activity in August, stoking concerns about the pace of recovery in the British economy. The GBP was down 0.8% at $1.6152 and was little changed against the EUR at 88.04 pence.

Looking ahead to today, the most important economic indicator scheduled to be released from the Euro-Zone is the Revised GDP at 9:00 GMT. Analysts are forecasting this figure to be unchanged from its previous reading. Traders will be paying close attention to today’s announcement as a stronger than expected result may boost the EUR in the short-term. Traders are also advised to follow the Construction PMI figures coming out of Britain at 8:30 GMT, and the ADP Non-Farm Employment Change figures coming out of the U.S. at 12:15 GMT as these results may set the EUR’s main currency crosses going into today’s trading.

JPY – The Yen Spikes to a 7 Week High

The JPY experienced a bullish trading session yesterday, as it appreciated against most of its major currency pairs. The Japanese yen traded near a 7 week high against the Dollar amid speculation asset prices are overblown, boosting demand for the relative safety of the Japanese currency.

The Yen was close to its strongest level versus the U.S dollar in more than a month after Asian shares slumped and CIT Group Inc. deferred interest payments on subordinated bonds. The Yen tends to gain in times of financial turmoil as Japan’s trade surplus reduces reliance on foreign capital, while the Dollar benefits from its status as the world’s main reserve currency.

Traders expect the Yen to continue benefiting for the rest of the week amid growing concern that any more pullback in equities could be a further drag on a global economic recovery.

Crude Oil – Crude Declines 3% As Stocks Drop and USD Strengthens

Crude Oil experienced another day of depreciation as prices fell nearly 3% to $68.04 in this morning’s early trading session. Oil prices traded down for the second straight day yesterday as economic concerns sent investors into safer havens, outweighing positive U.S. manufacturing and home sales data. The declines came after U.S. stocks dropped as renewed worries about the health of the U.S. financial sector shook investor confidence.

As for today, the Crude Oil inventories figures will be released. Expectations show a drop to -0.8M from last week’s of 0.2MM. Traders can, and should, expect wide market volatility around the 14:00 GMT release of these inventories figures because of Crude Oil’s recent importance to today’s market.

Technical News

The price of this pair appears to be floating in the over-bought territory on the daily chart’s RSI indicating downward correction may be imminent. The downward direction on the hourly chart’s Momentum oscillator also supports this notion. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.
There is a fresh bullish cross forming on the 4-hour chart’s Slow Stochastic indicating a bullish correction might take place in the nearest future. The hourly chart’s Momentum oscillator also supports this direction. When the upward breach occurs, going long with tight stops appears to be preferable strategy.
The bullish trend is loosing its steam and the pair seems to consolidate around the 92.80 level. The 4 hour chart’s RSI is already floating in an overbought territory suggesting that a recent upwards trend is loosing steam and a bearish correction is impending. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.
The pair has experienced much volatility recently, as it currently trades around the 1.0668 level. The weekly chart’s Stochastic Slow signals that the pair will drop in the short-term. However, this is contradicted by the daily chart’s RSI and MACD. Entering this pair when the signals are clearer may turn out to be a wise choice in today’s trading.

The Wild Card

Crude Oil prices are once again dropping, and it is currently traded around $68.60 a barrel. And now, the 4 hour chart’s Slow Stochastic is giving bullish signals, indicating that Oil prices might go up. This might give forex traders a great opportunity to enter a very popular trend.

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