US Retail Sales on Tap

The USD lost steam from last week’s strengthening vs. most of the major currencies as investors continued to feed their risk appetite, leading the higher-yielding commodity currencies higher. The greenback also weakened amid renewed concerns that the Federal Reserve could still have to cut Interest Rates to boost growth. As a result, the USD dropped 0.2% on the day to 1.5513 vs. the EUR having earlier hiked above the 1.54 mark.

Yesterday’s speech by Chicago Fed President Evans lowered the growth prospects for the U.S. economy. In his speech he highlighted the growing weakness in household spending, and said that economic growth will probably remain stagnant throughout 2008. U.S. inflation prospects also remain quite gloomy. Economists expect it to fall to within 1.5% to 2%, signaling the slowdown in countries productivity.

Looking ahead to today, we have a batch of very important US data. With many speeches to follow, the most important speech will be delivered by Fed Chairman Bernanke. High volatility is expected during his speech as investors will attempt to decipher Interest Rate clues. Traders will also focus their attention today on Core Retail Sales and the Retail Sales figures. These indices shall give a more accurate picture of consumer spending, which is a major driver of the economy and has a sizable impact on GDP. Traders pay close attention to Retail Sales because it is usually the first significant indicator of the month that relates to consumer behavior and is susceptible to surprises.

Today traders may expect another volatile trading session for the U.S. currency as negative data can retain greenback’s bearish trend. Overall, we expect the greenback to remain consistent, as it could see small drops against its European counterpart.

Yesterday, the EUR gained against most its major counterparts as confidence in the market prompted a return to demand for the single currency.

The largest gain was vs. the USD (- 127 points) which is a 0.82% ascent. The news was dominated by European Central Bank President Trichet Speech. In his speech, President Trichet claimed that even though Euro zone inflation reached 3.3% in April, its monetary policy will ultimately be the one to determine the inflation rate for the long term. Yet despite Trichet’s calming attempts, voices stating that the U.S subprime crisis has already seeped into the European economy are much more vociferous, and rising commodities prices, especially Crude Oil, are cultivating that assumption.

Today will be a slow news day for Europe. The only indicator being published today is the Eurogroup Meeting, and is not expected to greatly influence over the EUR. Traders should mainly focus on the USD movements, as a bundle of data is due for that currency. Large volatility will also be demonstrated in EUR/USD fluctuations.

Yesterday the JPY saw bearish trends versus most of the major currencies. The most fascinating and unusual pair was the USD/JPY. The pair open and closed at 103.77 including a movement of 50 points through out the day, between the low and the high of the day.

Bank of Japan Governor Shirakawa spoke yesterday. In his speech, the Governor indicated that if the Japanese economy achieves a sustained expansion from a long term viewpoint, Interest Rates might be gradually raised. Yet he warned that downside risks still remain. Additionally, Machine Tool Orders came in at 0.3%. This decline of 3% from the previous year signals a decline in the manufacturing industry. Today we expect conflicting trends to come in. First will be the Corporate Goods Price Index which measures the inflation rate felt by corporations. This index is forecasted to decline 0.3% to 3.6%, and is expected to have a negative effect on the Japanese currency. On the other hand, the Current Account figures are expected to come out at 1.95T, which is 0.39T above the previous quarter. Such an increment should have positive effect on the JPY.

Given all the enthralling data coming out of Japan, this may be the time investors were looking for to price their positions and take advantage of future developments.

Technical News

There has been a strong breach through the upper level of the bearish channel on the 4 hour chart. The momentum on the daily chart is now bullish, yet the hourlies indicate a possible local bearish correction. Buying on dips might be a good strategy today.
The float within the narrowing bearish channel on the daily chart continues. The cable now floats in the middle of the channel with moderate bullish momentum. The daily Slow Stochastic is showing a strong bullish cross which implies an upcoming bullish correction. Going long with tight stops might be wise today.
There has been a very strong bullish cross forming on the daily chart which indicates the continuation of the bullish channel. The RSI of the 4 hour chart supports the bullish notion and it appears that the next target price might be around 104.50. Going long appears to be preferable today.
The typical range trading on the 4 hour chart continues. Both the hourly RSI and Slow Stochastic are floating in neutral territory. The daily chart is showing moderate bullish momentum with diminishing strength. Forex traders are advised to wait for a clearer signal before entering the market n this pair.

The Wild Card

The daily chart is showing a strong and distinct bearish channel. The Slow Stochastic is showing a strong bearish cross and it appears that a stronger bearish trend is quite imminent. Forex traders have a great chance of enjoying a very powerful technical signal with high profit potential.

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