Dollar Supported by Deepening Global Recession

Analysts expect the Dollar to maintain its strength as global investors continue to see the American currency as a safe haven. Today, traders are advised to follow the Core CPI and Consumer Sentiment figures from the U.S. later today, as these figures are likely to impact today’s trading.

Economic News

USD – Dollar Goes Bullish against EUR and JPY

The U.S Dollar rose yesterday against the EUR and the Yen, as hopes that the U.S. government would give more money to troubled banks urged many investors back into higher-risk assets. The greenback rallied heavily versus the European currency around $1.3028, after traders began selling the EUR as the European Central Bank (ECB) cut its Interest Rate, and left the door open to further rate cuts in the months ahead.

The market expressed some optimism for the USD after Congressional Democrats announced plans for an $825 billion tax cut, and spending bill that they hope will help President-elect Barack Obama boost the dismal U.S. economy. This optimism helped the Dollar add 0.8% or 89.84 vs. the Yen. The Dollar also increased against the Pound by 0.6% to 1.4655. Analysts say that the USD is likely to continue to appreciate against the EUR given investors’ hopes for a big stimulus package, which might be a slight positive for risk-taking. This is important, as it removes some uncertainty in the U.S economy in contrast to the recent weak economic data coming from the Euro-Zone.

Furthermore, the Dollar may also be supported by speculation due to the prospect of deeper losses in U.S. financial institutions in the foreseeable future. This may in turn prompt U.S. investors to favor their own currency as a safe-haven. This is likely to occur as the world’s largest banks such as the Citigroup Inc. and the Bank of America Corp. have lost $1 trillion since the start of 2007 on mortgage-related securities. Economists assume that the expectations for 4th quarter earnings remain low, and financial institutions are likely to report further losses in the coming months. Thus investors expect the Dollar to maintain its strength as capital preservation becomes increasingly important.

EUR – Rate Cuts Add to Euro Volatility

The European currency has slid on against a basket of major currencies on Thursday after the European Central Bank (ECB) lowered its Interest Rate from 2.5% to 2%. This matches a record low for the Euro-Zone, which has seen the Europe’s economic fortunes gone from bad to worse in recent months. Investors speculated that ECB President Jean-Claude Trichet may make additional rate cuts, as the economic slump deepens. The EUR fell to $1.3115 in New York, from $1.3191 yesterday and has declined about 9% against the Dollar since early December.

With data showing the Euro-Zone’s economic outlook deteriorating rapidly, investors speculate that the ECB will eventually have to bring borrowing costs down to around 1%. The severity of the economic crisis in Europe was also reflected by data showing Germany’s economy grew at its slowest pace in three years in 2008. In addition, Germany, the Euro-Zone’s biggest economy contracted by between 1.5% and 2.0% in the 3rd quarter of 2008. Economists stated that the ECB’s decision to lower Interest Rates on Thursday was an acknowledgment of the severe economic situation facing the region.

However, some analysts forecast that the EUR might rebound from a drop spurred by the European Central Bank’s Interest Rate cut, because previous experience indicates the ECB won’t keep its Rate low for long. According to analysts, traders should keep in mind the ECB former Interest Rate decisions. Since ECB President Jean-Claude Trichet is aware that a falling inflation number is likely to turn negative does not mean to say that it will remain negative for a long period of time.

JPY – Yen Continues its Slide against the Euro

The Yen fell for a second day against the EUR on speculation gains in Asian stocks and measures to stabilize the U.S. financial system will encourage investors to buy higher-yielding assets funded in Japan’s currency. The JPY slid to 118.46 per EUR from 117.87 late yesterday in New York. However, against the Dollar, the Yen was little changed, last traded at 89.96. The JPY gathered strength as Asian shares sank, with Tokyo’s benchmark Nikkei 225 tumbling nearly 5% as fears about a banking crisis and the global recession returned to center stage. The Japanese currency tends to outshine other major currencies for its perceived safety when the market is under severe stress. Thus the trend points towards the Yen firming while stocks decline.

The JPY also declined as a result of the poor machinery orders on Wednesday led to less confidence in Japan’s currency. According to analysts, the Yen’s bearishness is likely to be limited as the market focus is on stocks. The government data showed that Japanese core private-sector machinery orders, a key gauge of corporate capital spending fell a record 16.2% in November from the previous month. The sharp decline shows just how deep the global recession has hit Japan’s economy.

OIL – Oil Slips 5% as Economic Glooms Continues

Crude Oil prices declined more than 5% on Thursday as thickening economic gloom added to worries that world energy demand will continue falling this year. Crude fell $1.88 to settle at $35.40 a barrel, after falling as low as $33.20, its lowest price since December 19. The losses came after U.S. economic data showing that the number of U.S. workers filing new claims for unemployment benefits rose last week. Additionally, U.S. foreclosure activity jumped 81% in 2008, suggesting the recession in the world’s largest energy consumer nation is deepening.

The deteriorating global economic outlook has prompted the Organization of the Petroleum Exporting Countries (OPEC) on Thursday to forecast a fall of 180,000 barrels per day in world Oil demand this year. This is 30,000 barrels steeper than its previous forecast. The cartel has already cut 4.2 million barrels from the world market since September. OPEC’s President Botelho de Vasconcelos stated on Thursday that production may be cut further in the coming months if needed.

Technical News

Narrow range trading continues as the pair did not make a significant move in either direction, and is currently traded around the 1.32 level. The daily chart RSI is already floating in the oversold territory. It appears that the possible next move might be a bullish one. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
The bullish trend is loosing its steam and the pair seems to consolidate around the 1.48 level. The 1 hour chart’s RSI is already floating in an overbought territory suggesting that a recent upwards trend is loosing steam and a bearish correction is impending. Going short with tight stops appears to be preferable strategy.
The pair is continuing to provide mixed results, and is now trading around the 90.35 level. The one hour chart demonstrates a flat line ever since yesterday. The 4 hour chart’s Slow Stochastic is showing no crosses, which indicate that the bullish trend may continue. Going long appears to be preferable today.
The 4 hour chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the daily Chart’s RSI is already floating in the overbought territory indicating that a bearish correction might take place in the nearest future. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.

The Wild Card

Gold prices rose yesterday and peaked at $824.53 for an ounce. The 1-hour chart is still showing growing bullish momentum, while the daily studies also support that notion. This may prove to be a good opportunity for forex traders to join a potentially strong uptrend that might yield high profits.

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