Economic Stimulus and Monetary Policy Spark a Dollar Recovery

The Dollar moved sharply higher as the Federal Reserve held its benchmark interest rate at a historic low while it is exploring other alternative methods for fixing the American economy. The passage of Barack Obama’s economic stimulus package also lent weight to the notion that the U.S. is on track for a relatively speedier recovery than the rest of the world. Will these efforts pan out in favor of the USD in the long run?

Economic News


USD – Dollar Strengthened by Fed’s Statements

Yesterday’s trading was highlighted by the Dollar’s rally across the board after the release of the Federal Reserve’s statement on Wednesday afternoon during the New York trading session. The greenback jumped against the EUR with the pair plunging below a significant support level of 1.3100. The Dollar also reversed most of its downward momentum against the Pound, closing the day at 1.4155. Against the Japanese Yen, the Dollar rose from 89.22 to end the day at 89.68.

The Dollar began the day in the red as traders feared the Fed may take up more unconventional methods of battling the U.S. economy’s downturn. It was suspected that the Fed would buy long-term Treasury bonds in order to help lower U.S mortgage rates. There were also rumors in the market that the Fed would undertake efforts to prevent deflation from occurring. Traders have a negative view of these tactics as a rise in inflation would significantly hurt the Dollar’s purchasing power.

Other traders have also taken the view that the Fed has been very aggressive in tackling the economic crisis in the U.S. The Federal Reserve was out in front of its European and British counterparts, slashing interest rates and aggressively adding bad banking assets to its balance sheet to support the U.S. banking industry. This has helped to create positive momentum for the Dollar.

Today’s trading of the USD will focus on two pieces of fundamental data. Due to be released today is the core durable goods orders and new unemployment claims. Both indicators are expected to show sharp declines. This may hurt the Dollar in the short term, perhaps sending the EUR/USD higher to the 1.3200 mark by day’s end.

EUR – Interest Rate Speculation Provides a Temporary Boost to the EUR

The EUR experienced high volatility in the wake of a speech by European Central Bank (ECB) President Jean-Claude Trichet. During a speech at the World Economic Forum (WEF) in Davos Switzerland, Trichet hinted that the ECB may hold interest rates steady for their upcoming policy meeting scheduled for Feb 5th.

The ECB has repeatedly reduced European interest rates in light of the economic recession in the Euro-Zone economy. Currently the Minimum Bid Rate stands at a record low 2.00%. Market analysts have forecast a rate cut of 0.50% during the ECB’s next meeting. ECB board members must now balance the ability to ease monetary policy to fight the economic downturn in the Euro-Zone, while avoiding cutting rates too much too quickly. Policy-makers fear that a sharp drop in interest rates could lead to future inflationary pressures.

A report released today by the International Monetary Fund (IMF) was an updated economic forecast for the Euro-Zone economy. The IMF slashed its growth rate projection from a decline of 0.50% to a much larger contraction of 2.00%.

The Euro-Zone economy appears to be deteriorating faster then previously thought. But policy-makers may be sending mixed signals to the market. The ECB has not kept up with the Bank of England or the Federal Reserve in its mission to stem the tide of the economic downturn. Perhaps more aggressive moves are needed by the ECB. Then we may see some appreciation in the EUR.

JPY – Strengthening USD Puts Downward Pressure on the Yen

The USD/JPY was driven higher today on the Fed’s comments and an increase in risk appetite. Fueling the appreciation of the Dollar was a rise in the Dow Jones Industrial Average. When U.S. equity markets rise, this pair tends to rise as well. Also fueling an increased risk appetite was the passage of Barack Obama’s economic bailout plan by the U.S. House of Representatives. These factors helped to rally the USD/JPY to end the day at 89.68. The pair now stands at a one-week high.

The Yen is largely seen as a safe haven currency to be used during times of financial distress. As traders grow more comfortable taking on further risk, they will abandon their positions in the Yen for the USD and higher yielding currencies. Risk sentiment appears to be improving as the Federal Reserve and the Obama administration are teaming up to restore confidence and future prospects for a stable economic recovery. This may boost the USD/JPY in the near term and we may see the pair rise to the 91.00 level.

Oil – Crude Supplies Drop the Price of Oil

The price of Crude Oil dropped yesterday as U.S. Crude Oil Inventories were reported to be almost 2.5 times higher than forecasted. This helped to lower the price of Oil to end the day down at $41.51, though the drop in price was less significant than yesterday’s plunge.

The rising inventories are an example of what is occurring in the market for Crude Oil. There is currently a glut of supply with wavering demand. Oil refineries have not cut production enough to arrive at equilibrium with demand. These market forces will settle once a return of confidence is seen in the global economy. Traders may look for further easing of the price of Crude Oil as the $40 mark could be in sight once again.

Technical News


EUR/USD
After witnessing a significant drop yesterday, this pair appears to have found a short-term equilibrium. The oscillators on all charts are indicating a lack of direction for this pair with the only useful information being given by the weekly chart’s Momentum oscillator which shows that the downward movement may continue. Waiting for a clearer signal might be the right strategy today.
GBP/USD
It appears that the price is currently floating in the over-sold territory on the hourly chart’s RSI indicating an upward correction may occur in the very near future. The price of this pair is also located near the lower border of the hourly chart’s Bollinger Bands, which lends support to the notion of an imminent upward correction. Going long with tight stops might be the right choice today.
USD/JPY
The Slow Stochastic on the 4-hour chart is showing a bearish cross has just occurred and is pushing the pair further down. The weekly chart’s Momentum oscillator also indicates a continuation of the downward movement. On the contrary, the hourly chart’s Slow Stochastic may be forming a bullish cross in the near future, signaling the downward movement may witness an upward correction within a short time frame. Going long with tight stops might be a good strategy for the short-term today.
USD/CHF
The price of this pair appears to be floating in the over-bought territory on the 4-hour chart’s RSI indicating a downward correction may be imminent. A bearish cross forming on the 4-hour chart’s Slow Stochastic supports this notion. Going short might be the right choice today.

The Wild Card


Gold
The price of this commodity appears to be hovering near the over-sold territory on the hourly and 4-hour charts’ RSI, signaling an upward correction may occur soon. The imminent bullish cross on the 4-hour chart’s Slow Stochastic adds weight to this notion, while the weekly chart’s Momentum oscillator also shows sharp upward pressure. As this commodity continues to surge upwards, forex traders have the potential to join the upswings by entering early at great prices and capturing their profits.

Written by: Forexyard.com