Will the U.S. Housing Market Show Further Signs of Stress?

The U.S. economic rescue plan, as well as the Home Sales figures, has created a frenzy in the market recently. Yesterday, the greenback underwent a volatile trading session against most of its currency counterparts. Today, traders should pay special attention to the New Home Sales survey. If it delivers unfavorable figures, it will validate a problematic landscape in the U.S. housing sector and weaken the USD versus its currency counterparts.

Economic News

USD – U.S. New Home Sales on Tap

The U.S. economic rescue plan of Bernanke and Paulson, as well as the Existing Home Sales figure, has caused frenzy in the market recently. Yesterday, the greenback underwent a volatile trading session against most of its currency counterparts. Starting the early trading sessions off rather flat, the USD’s value suddenly dropped following the 14:00 GMT announcement of the Existing Home Sales indicator as it came out worse than forecasted. Correcting this move, however, was the jump in value directly after Paulson and Bernanke’s testimonies late yesterday afternoon. It finished the day around the 1.4670 level against the EUR, slightly stronger than it was the day before.

The trading day began with small downtrends and low volatility for the USD as investors realized that the U.S leadership is having second thoughts regarding the financial bailout plan. Yesterday, Federal Reserve Board Chairman Ben Bernanke testified to the Congressional Joint Economic Committee stating that global financial markets were under extraordinary stress and threatening an already weak U.S. economy. He also testified that lenders are still more likely to remain cautious about extending credits to households and businesses, and described a gloomy economic outlook for the near future. However, it seems that Bernanke’s decision to urge Congress to confirm the rescue plan was enough to trigger an uptrend for the USD later in the afternoon. This uptrend was strengthened by a continuation of the steady decline in Crude Oil prices, which fell to $105 a barrel after spiking to as high as $109 after the USD’s early-afternoon weakness.

As for today, a batch of data is expected from the U.S. economy. So long as no crucial decisions regarding the bailout plan are made, these figures are expected to set the tone for the USD’s pairs and crosses. Special attention should be given to the New Home Sales survey because if it delivers unfavorable figures later today, it will validate a problematic landscape in the U.S. housing sector, and the USD is likely to weaken as a result. Also today, the Core Durable Goods Orders and Unemployment Claims are scheduled which should also have an impact on the market.

EUR – EUR Strength Uncertain in Light of Negative Economic Data

Yesterday the EUR experienced a rather volatile session against the other major currencies as traders saw large fluctuations throughout most of the day. Despite a somewhat uncertain USD, the EUR still managed to lose over 100 pips against the dollar! However, after markets were closed, it managed to rise back to its former levels. The Euro-Zone continues to deliver negative signals, yet it seems that until global markets stabilize, and until clearer signs are given from the U.S. economy, the EUR will keep fluctuating without running through any significant breach.

The German Ifo Business Climate extended its continuing drop over the last 7 months as it was published at 92.9, failing to reach expectations of a 94.2 reading. This survey represents the slowdown in the German economy, as it was marked at 104.8 in March and has been dropping steadily on a monthly basis since then. The Euro-Zone is mostly affected by the German and French economies, and the poor figures delivered from these countries have generated the strong downtrend the EUR underwent in the previous two months, which was only halted by last week’s turmoil caused by the U.S. economy.

Right now, the EUR is mostly impacted by U.S. developments, as investors around the world are closely following what moves will be enacted by the U.S. leadership in order to improve the economy’s condition. Until then, as long as the uncertainty in the global markets remains, the EUR is likely to slightly benefit, as the USD is much more damaged by recent events. Nevertheless, the poor figures from the Euro-Zone may also prevent it from over-strengthening against the major currencies, and the overall volatile sessions are likely to continue throughout the near future.

JPY – Japan Experiences First Trade Deficit Since 1982

The JPY experienced a rather bearish session yesterday versus the other major currencies. The Yen was traded with falling trends during the early trading sessions, but managed to recover slightly later on.

The Japanese economy is beginning to be damaged by the U.S. economic slowdown. A good example was delivered yesterday as the Japanese exports to the U.S. fell by 19.1% in August, marking its lowest figures since January 2006. This was one of the reasons why Japan’s Trade Balance figure was released yesterday as -0.11T for August. Excluding the month of January, when Japanese shipments overseas tend to drop on slower factory activity during the New Year holidays, it was the first deficit since 1982. The JPY lost its bullish momentum as investors lost their confidence that the Japanese economy will be less affected by recent events, and it is once again proving that a slowdown in U.S. economic activity also means a slowdown for global economic activity.

As for today, the Tokyo Core Consumer Price Index, which accounts for a majority of overall inflation, will be released and is forecasted by analysts to increase by 1.5%. Traders are advised to follow the publication of this indicator as a higher-than-forecasted result might generate an uptrend for the JPY, as high inflation may compel the Japanese bank chiefs to raise interest rates, and investors are very much aware of this. Traders should also stay tuned to the development of the U.S. economic rescue plan as further details may determine today’s directions.

Oil – Market Anxiety Causes Crude Oil Price to Fluctuate Sharply

Predicting the movement for the price of Oil these past days has proven a difficult task for market analysts. Just when it was believed that traders would see a price range of $80-90, the price jumps back up to an unbearable level. These suspicious price jumps are being investigated, but that does not mean they have ceased. Yesterday, traders saw a recurrence of Monday’s upswing as Oil prices peaked just over $109 before falling back to $105 by the end of the trading session. It appears as if the price of Light Sweet Crude floats in expectation of economic indicators and then jumps accordingly.

As with this past week, the direction for the price of Crude Oil will be driven by the perceived strength of the USD. With U.S. Crude Oil Inventories dropping 1.5M in yesterday’s release, beating the forecast of a 2.0M decrease, Crude Oil leveled off later in the session and now sits near the $106 mark. However, during today’s early sessions, the price of Oil appeared to be floating in the same manner as it had done during yesterday’s early trading session. This is an indicator that its price is once again waiting for some sign of movement by the USD before choosing a clear direction. Smart traders could play off this anticipation and earn big profits by following closely those indicators which affect the USD as they have a strong inverse relationship with the price of Crude Oil.

Technical News

The 4-hour chart is showing that the pair is still floating within its bullish channel. However, the RSI on the daily chart has crossed the 80 line, indicating that the market is overbought. The Slow Stochastic is also showing a fresh bearish cross, suggesting that a bearish trend is imminent. Going short with tight stops appears to be preferable.
The pair is in the middle of a strong uptrend, and is testing fresh highs on a daily basis. The very important key resistant level of 1.8600 has been breached and the pair is likely to continue is bullish trend. Next target price might be around 1.8700.
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 either. Waiting for a clearer sign on the hourlies might be a good strategy today.
For the past few days the pair has been floating around 1.0800, with no apparent breach. Now, however, new signs for a bearish move are given in the form of a bearish cross on the Slow Stochastic of both the daily and the 4-hour chart. Traders are advised to wait for the break and swing.

The Wild Card

It seems that the strong bearish move that Oil experienced lately has vanished. As all oscillators on the daily chart are giving bullish signals, a bullish correction might be impending. This may give forex traders an excellent opportunity to catch the trend at a very early stage.

Written by: Forexyard.com