USD Looks to Continue Bullish Trend Ahead of Full Day of Data

With New Home Sales on Tap Will EUR/USD Test 1.4550?
Intra-day gains in the dollar on a better-than-expected U.S. Existing Home Sales report tended to be short lived even though stabilization in the U.S. housing market is seen as critical to ending some of the concerns on the U.S. economy. The dollar finished yesterday’s trading session with mixed results versus the major currencies while staying relatively unchanged against the EUR ultimately closing at 1.4709.

Still, lingering concerns on problems at U.S. mortgage finance companies Fannie Mae and Freddie Mac are keeping housing data at the forefront of investors’ focus for this week. Data on New Nome Sales for July and 2 surveys of Nationwide House Prices are expected to be released today.

Meanwhile, Federal Reserve Chairman Ben Bernanke spoke on financial stability at the Kansas City Fed’s annual Jackson Hole conference. His commentary didn’t necessarily reveal anything new, though he did say that the recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth should lead US inflation to moderate later this year. Analysts estimate that longer term prospects for a stronger USD remain intact given that the United States is likely to overcome the problem of slower growth sooner than other nations. The general sentiment towards possibly lower Interest Rates and towards the U.S. economy managing to get out of the global crisis earlier than the other economic areas will probably support the dollar over the next couple of months.

In today’s housing data investors will look for clues on whether the battered property market is indeed stabilizing – which would be a relief for both the economy as well as for hard-hit US financial firms holding mortgage assets.

Later today, the FOMC Meeting Minutes from the Federal Reserve’s August meeting may also be the event to watch. This record of the FOMC’s latest meeting is expected to provide insights into the economic conditions that influenced member’s vote on Interest Rates as well as offering clues on the possible outcome of future votes.

EUR Drops On Speculation of Euro-Zone Turmoil.
The EUR dropped towards a 6 month low against the USD yesterday before the German Ifo survey of business sentiment, with investors seeking clues on whether the Euro zone economy is hurting enough for a cut in Interest Rates. In thin yesterday’s trade on the back of a UK public holiday, the EUR was down 0.3% at $1.4709 and down 0.7% at 161.68 vs. the JPY.

Signs of a broadening global economic slowdown have given the USD a boost in the past month as investors have dumped the currencies of economies losing steam, such as the EUR and the GBP. In fact, British Pound hit 2 year lows against the dollar on Monday. Last week’s data showed the UK economy ground to a halt in the second quarter of the year, its worst quarterly performance since 1992, highlighting the risk of a British recession and raising the chance of a UK Interest rate cut later this year. Overall, the pound is down 6.6% against the dollar in 2008, the largest drop of any major currency other than the New Zealand dollar. With stalled UK growth which is seen as another example of growing economic malaise outside the United States, the GBP weakness helped the dollar against some currencies including the EUR.

Looking ahead for today, there are few major indicators on hand, though some releases can spark short-term volatility including both German IFO Climate and German IFO Expectations indices.

Japanese Economy Once Again Faces the Threat of Deflation.
Yesterday, the JPY was up broadly on the unwind in carry trades, although traders noted that the Japanese currency does not respond as sharply to the moves in stocks as it did earlier in the year when any sharp equity slide would send the Yen flying higher. By the end of yesterday’s trading session, the JPY added 0.6% and closed at 109.41 vs. the USD. The big question now is whether it’s the beginning of the carry trade unwind wave and a trend reversal for the Japanese currency or just another local correction.

Until yesterday, the JPY appreciated against the USD as U.S. financial shares dragged equity markets lower on persistent credit concerns, which prompted investors to reduce risk. The decline in the attractiveness of U.S. assets reduced demand for the dollars to buy them while simultaneously pushing investors into investments perceived as less risky, such as the Yen.

As usual, the move in the Japanese yen has little to do with Japanese fundamentals, and instead depends much more on broad risk appetite. This should continue to be the case during the rest of this week even though there will be heavy risk events on hands. Today there is no news events expected from the Japanese market, however on Thursday the Japanese CPI, the Unemployment Rate and Retail Sales numbers will all hit the wires. The CPI numbers may not influence price action too much, but the indicator should be watched as the headline index is anticipated to hit decade highs due to energy and food costs, while the core measure may barely reflect positive price growth.

Indeed, once commodity prices start to fall back again, the Japanese economy will once again face the threat of deflation. Concerns about credit risks both in the United States and Japan are still strong and given the risk of recession in the country, traders will be looking for indications that the BoJ is considering reducing Interest Rates.

Baku-Tbilisi Pipeline May Resume Full Operations Within Days.
Crude Oil was little changed after rising yesterday to a $115.40 level as tropical storm Gustav formed in the Caribbean Sea, raising concerns it may threaten oil fields in the Gulf of Mexico. Fields in the Gulf of Mexico account for about 20% of U.S. oil output. Prices also rose after Russian lawmakers voted to recognize the independence of two breakaway Georgian regions, increasing the prospect of new tensions in the area. On the other hand, the Baku-Tbilisi-Ceyhan pipeline, which moves oil from Azerbaijan through Georgia to Turkey’s Mediterranean coast, may resume full operations within days after a fire halted exports. This may definitely assist in bringing Oil prices further down. U.S. Light Crude edged up 29 cents yesterday to $115.40 a barrel though it still remains more than $30 below an all-time high reached only a month ago.

Technical News

The pair is in the middle of a bearish trend as the attempts to breach through the 1.4620 support level continue. The daily chart’s Slow Stochastic indicates that the bearish momentum is still strong and a breach is very likely. Going short appears to be preferable.
The cable is testing the key Fibonacci level of 1.8400 and is the middle of a very strong bearish trend. A breach through that level will validate a much stronger bearish trend that might take the pair to the 1.8350 zone. Going short might be the right path today.
The bullish channel continues at full steam, as the 4 hour chart is showing that there is still much steam in the trend. The daily chart is showing a double doji formation with a bearish cross on the slow stochastic which might indicate a moderate corrective move before the bullish trend resumes. Buying on dips might be a great strategy for that pair.
The bullish trend continues at full steam as the pair shows no immediate signs of a halt. The 4 hour Slow Stochastic is showing a positive slope and the RSI is floating at 50 which points at additional bullish momentum. There seems to be no upcoming correction on the local level, and going long looks like the right decision today.

The Wild Card

After experiencing a high volatility during the past 4 days, this commodity is probably heading down again. There is a very strong reversal cross forming on the slow Slow Stochastic of the 4 hour chart which indicates that the bearish trend might be back with full steam. This could be a great opportunity for forex traders to enter the market with a long position at a great entry price.

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