EUR and GBP Weakening in Expectation of Euro-Zone Rate Cut

The USD has advanced against the EUR and GBP on speculation that the European Central Bank (ECB) and Bank of England (BoE) will reduce borrowing costs this week in response to the expanding recession in the Euro-Zone. Europe’s inflation rate already fell to 2.0% in November from 3.2% in October, which gives ECB policy-makers more room to cut borrowing costs when they meet this Thursday.

Economic News

USD – The Greenback Gains on Speculation ECB Will Cut Interest Rates

The USD rallied on Monday after Federal Reserve Board Chairman Ben Bernanke said the United States is now better equipped to tackle systemic risks. The USD is trading around 1.2610 against the EUR, compared with 1.2641 before Bernanke’s remarks. Bernanke also said that the Fed was considering a further rate cut from its current target of 1.00%; however, he also suggested the Fed might use other, less conventional, measures besides Interest Rate cuts to stimulate economic growth. The greenback also advanced against the EUR on speculation that the European Central Bank (ECB) will reduce borrowing costs this week in response to the expanding recession in the Euro-Zone. Europe’s inflation rate already fell to 2% in November from 3.2% in October, which gives ECB policy makers more room to cut borrowing costs when they meet December 4th, according to economists.

Against the JPY, however, the USD fell to 94.61. Analysts predict that the American currency may decline even further against the JPY as the U.S. reports showed that manufacturing contracted this week and employers cut jobs by the most since 2001 as the recession in the U.S continues to deepen. In addition, the U.S. Non-Farm Payrolls shrank by 320,000 workers in November following a decline of 240,000 the previous month. The U.S. government reports show that the world’s largest economy contracted at a 0.5% pace in the third quarter and consumer spending fell at a 3.7%, the most since 1980.

The Dollar declined against the Japanese currency on speculation a recession in the global economy and stock market slide will spur Japanese investors to bring money held in overseas assets back home. When the economic climate is poor, Japanese investors tend to repatriate capital during periods of risk aversion, analysts say. Therefore, despite the fact that the Japanese economy is also headed towards recession, the USD is likely to continue to weaken against the Yen and may reach lows of 90.00-93.00 by the end of 2008.

EUR – Euro-Zone Currency Slides as Global Economic Fears Deepen

The EUR extended its decline against the USD and JPY currencies. The European currency fell as low as 117.46 Yen in yesterday’s trading sessions. The EUR also fell against the Dollar as worries of a deepening economic recession in the Euro-Zone led investors to take refuge in Treasury Notes; it decreased almost 0.7% to 1.2608 per EUR. Against the JPY the European currency depreciated on speculation that declines in global manufacturing and stocks will prompt investors to buy back Japan’s currency at the expense of higher-yielding assets.

The poor data coming from the Euro-Zone, as well as the British economy, has removed any doubt among investors that both the European Central Bank (ECB) and the Bank of England (BoE) will cut their Interest Rates on Thursday. The only debate now is over the size of the cuts; with economists generally agreeing that there is a greater risk the central banks will deliver larger cuts than the 50 basis point consensus previously forecast. The Euro-Zone was officially declared as in recession this month following a second quarterly contraction in economic output. Analysts do not see the economy growing again until the third quarter next year, and then only marginally.

Economists speculate that the European policy-makers will lower Interest Rates this week to 2.75% in the Euro-Zone and 2.00% in the U.K. These aggressive rate cuts from the central banks are designed to stem the economic slowdown which will likely ensure that the Dollar and Yen remain the best performing currencies over the coming months.

JPY – JPY Benefits as Major Banks are expected to Cut Interest Rates

The Japanese currency continues to remain relatively stronger than usual among the major currencies, which has a lot to do with the risk sentiment that the market is experiencing. The JPY reached a one-month high versus the Dollar as plunging equity prices prompted investors to reverse risky trades. The JPY performed its best against currencies of countries where central banks are expected to slash Interest Rates later this week, including the EUR, GBP, and the Australian and New Zealand dollars. In late New York trading, the Yen was up 2.4% against the Dollar at 93.18 and up 3.0% against the EUR at 117.59.

The JPY also benefits from the recently slumping stock market. If equities and other risky assets continue to take a hit, analysts state that the Yen could easily take its late-October highs and then continue gaining strength through early 2009. As the global economy slows, the Bank of England (BoE), the European Central Bank (ECB), the Reserve Bank of Australia and the Reserve Bank of New Zealand are all expected to cut rates by at least half a percentage point, diminishing the yield advantage of their currencies over the ultra-low yielding Yen. Japan has a benchmark Interest Rate of 0.30%, compared to 5.25% in Australia, 6.50% in New Zealand and 3.00% in the U.K. A global recession may make investing in higher-yielding overseas assets more risky for Japanese investors and will probably encourage domestic investors to bring back overseas earnings, this may then push the JPY up even further.

Oil – Crude Oil Prices Shrink as OPEC Delays its Decision to Cut Production

Crude Oil prices descended bellows $49.00 a barrel yesterday after the Organization of Petroleum Exporting Countries (OPEC) delayed their decision on new supply cuts until later this month. Crude prices have tumbled since July as the economic crisis reduced demand in the United States, and other large energy consuming nations. Following their meeting last week, the OPEC cartel has agreed to trim 2 million barrels per day from production since September. Crude Oil prices have tumbled 67% since reaching a record $147.27 a barrel in July as the U.S., Europe and Japan faced simultaneous recessions; an event not seen since World War II.

Apparently there isn’t much OPEC can do to stop the free fall in oil prices, as a weakness in the manufacturing sector foretells a further demand slump for Crude Oil. OPEC Secretary General Abdalla el-Badri said that the group will reduce oil production when it meets in Oran, Algeria, this month on December 17. Since the global market is already oversupplied, the Secretary General said Crude demand is likely to drop even further in 2009. Analysts say that this postponement by OPEC’s policy-makers to reduce output, combined with the negative economic outlook, might send Crude Oil prices even lower than $40 a barrel by the end of this year!

Technical News

The float within the wide bearish channel on the 4-hour chart continues, as no significant breach has been made. The negative slope on the daily chart’s Slow Stochastic indicates the continuation of the bearish momentum within the channel. Going short with tight stops appears to be the preferable strategy today.
The bearish trend continues with plenty of steam as the pair now floats around 1.4900. The Slow Stochastic of the hourlies indicates that there is still more room to run. The next target price might be 1.4800. Going short with tight stops seems like the right choice today.
The bearish flag formation on the 4-hour chart is still valid as no major breaches occurred. The momentum is still very bearish as pointed by the daily RSI. Forex traders should wait for an additional breach through the 92.80 level to validate the next sharp bearish move.
This pair is in the midst of a narrowing upward channel and is now floating in the middle of it. The hourlies are showing mixed signals with its RSI floating in neutral territory. However, the Slow Stochastic of the daily chart is showing quite a strong bullish momentum, and the RSI confirms that the direction is indeed up. All indications are that there is more room for further upward movement and the preferable strategy today will be to go long on dips.

The Wild Card

This commodity has been on a sharp sinking movement over the last day and this bearish correction is likely to stick around in the near future. All charts are still providing a mild bearish signal; however, there may be short-term corrections during this downtrend. Therefore, forex traders can maximize profits by selling on highs and taking advantage of this bearish trend.

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