Market Awaits Bernanke’s Testimony on Future Monetary Policy

The Dollar continued to drop against the Euro yesterday, mainly due to speculations regarding a possible rescue plan for Greece. As a result, crude oil and precious metal rose as well. However, today at 15:00 GMT Fed Chairman Bernanke is expected to deliver a speech, on which he will most likely refer to the Fed’s intentions regarding U.S. monetary policy. Harsh volatility is expected to take place during his speech, and traders are advised to be prepared.

Economic News

USD – Dollar Slides as Risk Appetite Grows

The Dollar dropped against most of the major currencies during yesterday’s trading session. The Dollar fell sharply vs. the Euro and the Pound, and the EUR/USD pair reached a weekly high of 1.3838.

Two main reasons led to the Dollar’s depreciation today. The first reason was ongoing speculations that Greece’s economy will be rescued. This has helped to correct some of the Euro’s recent losses, and as a result it has weakened the Dollar. In addition, this optimism also boosted risk appetite, turning investors to look for higher yielding assets such as the Euro and the Pound. The second reason was a lower than expected Economic Optimism survey figures. The survey showed that U.S. citizens are pessimistic regarding their personal financial outlook and have less confidence in federal economic policies.

Looking ahead to today, many interesting economic publications are expected from the U.S. On 13:30 GMT the Trade Balance for December will be published. This report measured the difference in value between imported and exported goods and services during December. Analysts forecast the U.S. trade deficit has reduced from 36.4B to 35.8B during December. If this will indeed be the actual result, it is likely to strengthen the Dollar. Also today, at 15:00 GMT the Federal Reserve Chairman Ben Bernanke will testify before the House Financial Services Committee in Washington DC. Bernanke is intended to discuss the U.S. future monetary plans, and the market is likely to have an immediate response to his speech.

EUR – Euro Rallies on Possible Greece Rescue

The Euro rose sharply yesterday against most of the major currencies. The Euro gained over 150 pips against the Dollar, and over 200 pips against the Yen. The Euro also saw a mild rising trend against the Pound.

The Euro was boosted on prospects that the Euro-Zone will aid Greece to restrain their budget crisis. Speculations regarding a possible bail-out plan have ignited demand for higher-yielding assets and strengthened the Euro, particularly against safe-haven assets such as the Dollar and the Yen. Current estimations consider a possibility that Germany will step up with a plan to support the Greek economy. As long as the optimism regarding the Greek economy will continue, higher-yielding assets, such as the Euro and the Pound, are likely to be supported.

As for today, traders are advised to continue looking for further indications regarding the Greek economy, as this seems to have the largest impact on the Euro at the moment. In addition, traders should follow the French Industrial Production report, which is scheduled for 07:45 GMT. This report measures the change in the total value of output produced by French manufacturers. Current expectations are that the French Industrial Production rose by 0.6% during December. If the end result will be similar, it looks to support the Euro.

JPY – Yen Drops against the Majors

The Yen’s bullishness was halted yesterday, as the Yen dropped against all the major currencies. The Yen fell 80 pips against the Dollar, over 200 pips against the Euro and about 250 pips against the Pound.

Recent speculations regarding a Euro-Zone rescue plan for Greece have reduced demand for the Yen. Optimism regarding a potential Greece rescue have revived demand for higher-yielding assets, and weakened the Yen. In addition, a Chinese stock rally has helped to reduce risk aversion, driving investors to buy back riskier currencies such as the Euro and the Pound. It currently seems that as long as the Euro continues to strengthen due to optimism regarding the Greek economy, the Yen is likely to drop further.

Today, Japanese banks will be closed in observance of National Foundation Day, and low liquidity is likely to take place. Traders are advised to follow the leading publications from the U.S, especially Bernanke’s speech, as this is likely to impact the market the most today.

OIL – Spot Crude Oil Prices Reach $74

Crude oil prices rose significantly yesterday. A barrel of crude oil was traded for $71.50 as yesterday’s session began, however as the trading day progressed, crude oil rose further and further, ultimately reaching $74.05 a barrel.

Two main reasons led to the bullish trend of crude oil yesterday. The first reason is the increased risk appetite which was observed in the market today. Speculations regarding a possible rescue plan for Greece have turned investors to look for higher-yielding assets, such as crude oil. The second reason was the slide of the Dollar. Crude oil is valued in USD, and as such, when the Dollar drops sharply, crude oil tends to rise in accordance.

Looking ahead to today, traders are advised to follow the U.S. Crude Oil Inventories report, scheduled for 15:30 GMT. This report measures the change in the number of barrels of crude oil held in inventory by commercial firms during the past week. If the end result will fail to reach expectations for 1.4M barrels, crude oil is likely to be supported.

Technical News

The pair is currently being traded near the support line of 1.3777 and after yesterday’s rally the daily chart shows signs of a correction in the bearish trend. The MACD histogram has breached above the 0 line, indicating the potential for the price to move higher. This move is supported by the 7-day Relative Strength Indicator that has moved into the oversold region and has since broken above the 30 line. Traders may want to scale back their bullish positions or go long on the pair today to catch the potential correction.
The bullish correction in the pair may have left the price oversold on the 4-hour chart.
A bearish cross has formed on the Slow Stochastic Oscillator, indicating the potential for the price to move lower in the near term. Also the 7-day RSI has moved into the oversold region, forming what looks to be one top in a double top pattern. Traders may want to wait for the RSI line to break below the 70 level to go short. This could be a good opportunity for traders to get back into the market with the long term downward trend.
The daily chart shows the pair has broken its downward sloping trend line that began on January 7th. The correction is measured at 2.7% of the previous trend. Further signs of a bullish correction appear on the MACD. The histogram is on the verge of breaking the 0 line, along with a potential bullish cross forming, indicating a potential rise in the price. Traders may want to wait for the correction to measure above 3% on a closing basis and then go long on the pair with a take profit level at 90.70.
The price of this pair appears to be floating in the over-bought territory on the daily chart’s RSI, indicating a downward correction may be imminent. The downward direction on the weekly chart’s momentum oscillator also supports this notion. When the downward breach occurs, going short with tight stops appears to be the preferable strategy.

The Wild Card

The pair has recorded a bullish behavior yesterday. However, the technical data indicates that this trend may reverse anytime soon. For example, the 4- hour chart’s Slow Stochastic shows signals that a bearish reversal is imminent. Forex traders have the opportunity to wait for the downward breach on the hourlies and go short in order to ride out the impending wave.

Written by