ECB Rates and Federal Reserve Policy

The highlight of this week’s trading will be Thursday’s ECB Minimum Bid Rate. Traders will be expecting an initial increase of 25 bp and wording from the ECB that this week’s adjustment to the interest rate is not just a one off increase but the start of normalizing European monetary policy which would continue to benefit the euro. However, given last Friday’s strong non-farm payrolls data, today’s speech by Fed Chairman Ben Bernanke in Atlanta will carry extra significance. Should Bernanke come out with a more hawkish tone, this could be the beginning of a turnaround for the dollar.

Forex Market Trends

Daily Trend up no up up up up
Weekly Trend up up down down up up
Resistance 1.4249 1.6136 84.39 0.9575 1.0421 0.8840
1.4237 1.6123 84.25 0.9414 1.0407 0.8834
1.4231 1.6116 84.20 0.9328 1.0400 0.8831
Support 1.4219 1.6103 84.06 0.9166 1.0386 0.8825
1.4214 1.6097 83.97 0.9092 1.0379 0.8821
1.4203 1.6084 83.83 0.8931 1.0366 0.8814

Economic News

USD – Non-Farm Payrolls Data Supports US Economic Recovery

The jobs report for March showed a gain of 216K jobs on expectations of 191K new jobs added. The report was further supportive as the February numbers were revised higher to 194K from 192K. The unemployment rate surprisingly dropped to 8.8% from 8.9%. Also showing improvement was the ISM Manufacturing PMI which came in above expectations at 61.2 with economists forecasting only 61.1.

It is difficult to deny the improvement shown in the US economy. Five consecutive months of job growth boasts well for the economic recovery. The pickup in labor market conditions should now begin to influence the Federal Reserve and the wording in the Fed’s next statement could contain a more upbeat tone, emphasizing the labor market’s improvement in contrast to the consistent stubbornness of unemployment that is typically highlighted.

Given last week’s group of Fed members that came out in in favor of tightening US monetary policy and scaling back the Fed’s $600B quantitative easing program, Friday’s strong jobs data will bring to the forefront the debate for policy normalization in the US. Thus today’s speech by Fed Chairman Ben Bernanke in Atlanta will carry extra significance in the FX markets. Should Bernanke come out with a more hawkish tone, this could be the beginning of a turnaround for the dollar.

EUR – ECB Interest Rate Decision

Expectations are running high for the ECB not to disappoint the markets with an interest rate increase at this Thursday’s ECB meeting. ECB President Jean-Claude Trichet and other members of the ECB have taken huge strides to prepare markets for an increase in EU interest rates.

On Thursday ECB Governing Council member Nout Wellink stated his backing for winding down of ECB support and liquidity provisions. He highlighted the risks of continuing to print more money and a loose monetary policy. Last Monday Trichet continued with his hawkish rhetoric, highlighting inflationary data that continues to come in above the ECB’s target of below 2%.

Markets currently expect the ECB to increase interest rates on April 7th and it appears that the ECB has put its mandate for price stability ahead of the concerns for the indebted peripheral nations of Greece, Ireland, and Portugal.

While a 25bp increase may already be priced into the euro, there may be further room for euro appreciation should the ECB continue to pre-commit to interest rate hikes. A signal of further interest rate increases during the accompanying ECB press conference would be a catalyst for the euro. However, a change in US interest rate expectations is a risk to the 17-nation currency’s appreciation.

In early overnight trading the EUR/USD moved above the first resistance level at 1.4280 but quickly pulled back below to 1.4230. A target for future gains in the EUR/USD may be found at the January 2010 high at 1.4580. A move above this level would cause a significant shift in long term momentum, potentially triggering gains to the November 2009 high at 1.4270. To the downside, support comes in at last week’s low at 1.4020, followed by 1.3860.

JPY – Yen Weakness Continues

The sell-off in the yen versus the dollar and the euro continued on Friday and may extend further into this week’s trading. Talk of a renewal of the carry trade has added momentum behind the yen’s recent decline that began after the coordinated intervention by the G7 in the FX markets. Also supporting yen weakness has been a rebound in global equity markets following the selling that occurred after the geopolitical unrest in Libya and the natural disaster in Japan.

A catalyst for further declines in the yen would be higher relative yields. The ECB is expected increase interest rates by 25 bp this week and market watchers will be keying in on potential for further ECB rate hikes. Following last week’s hawkish comments by multiple Fed members and a strong non-farm payrolls report, a reevaluation of US monetary policy would continue to keep the yen on its back foot.

USD/JPY resistance is found at last week’s high of 54.70, followed by the trend line falling off of the June 2007 high which comes in at 85.40. The September 2009 high of 85.90 may also come into play with a significant resistance level at the May 2010 low at 88. Support is found at the 200-day moving average at 82.90 followed by a retracement objective to 81.50.

OIL – Crude Prices Up on Improved Economic Outlook

Crude oil prices surged to a 2-1/2 year high near $108.50 a barrel last week on stronger-than-expected U.S. jobs growth in March and weakness in the dollar.

The Labor Department said non-farm payrolls rose by 216,000 compared with economists’ estimates of a rise of 195,000. The February figure was revised upward to 194,000 from an estimate of 192,000, while the unemployment rate fell to a two-year low of 8.8% from 8.9% a month ago.

A weaker U.S. dollar tends to boost the price of dollar-priced commodities as it lowers the price to holders of other currencies and reduces the value of the currency oil producers receive for their product.

Looking ahead, traders are advised to watch carefully the global stock markets and the major economic indicators which will be published from the U.S. in order to predict the next movement in oil prices.

Technical News

The pair has recorded much bullish behavior in the past several days. However, the technical data indicates that this trend may reverse anytime soon. For example, the 8-hour chart’s Stochastic Slow signals that a bearish reversal is imminent. Going short with tight stops might be a wise choice.
The daily chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the 8-hour chart’s RSI is already floating in the overbought territory indicating that a bearish correction might take place in the nearest future. When the downward breach occurs, going short with tight stops appears to be the preferable strategy.
There is a fresh bearish cross forming on the daily chart’s Slow Stochastic indicating a bearish correction might take place in the near future. The downward direction on the 8-hour chart’s RSI also supports this notion. Going short with tight stops might be the right strategy today.
The pair has been range-trading for a while now, with no specific direction. The Daily chart’s Slow Stochastic is providing us with mixed signals. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.

The Wild Card

Crude prices rose significantly in the last month and peaked at $108.70 a barrel. However, the 8-hour chart’s RSI is floating in overbought territory suggesting that a recent upwards trend is losing steam and a bearish correction is impending. This might be a good opportunity for forex traders to enter the trend at a very early stage.

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