Dollar Jumps on Future EUR Interest Rate Moves

The Dollar rallied yesterday on possible Interest Rate cuts in the Euro-Zone while in Japan GDP and an intoxicated Finance Minister helped push the Yen Lower.

Economic News

USD – Dollar Rallies across the Board

A larger than forecasted drop in Japanese GDP curbed traders’ risk taking yesterday in the forex market. Also hanging over the market was dissatisfaction with the outcome of the G7 meeting and the passage of the U.S. economic stimulus bill. These market events failed to ignite a rally as traders moved into typical safe-haven currencies.

Risk appetite was curbed yesterday as Japan reminded the world that global growth is indeed slumping. Japanese GDP declined by 3.3%. This was worse than the forecasted number of 3.2% predicted by economists. The flight to safety sent the USD higher against the Yen. The market was also unimpressed with the end of the G7 meeting as the world’s finance ministers failed to lend any support to global currencies.

Analysts have been saying higher yielding currencies will get a boost once a turnaround in global economic activity is forecasted. The release of Japanese GDP is a signal that perhaps the worst is yet to come for slowing global economies.

Looking ahead to a brighter story today, the release of the TIC long term purchases is due at 14:00 GMT. The release is forecasted to show an improvement from last month’s dramatic drop in asset purchases by foreigners. If the TIC fails to reach its estimated target, look for the USD to depreciate to the 1.2750 level.


EUR – New Interest Rate Cuts are Priced in to the EUR

During Japanese trading hours, the EUR/USD made a significant downward move on a poor financial outlook in Europe and the potential for new Interest Rate cuts in the Euro-Zone. The start of the depreciation was due to concerns that Ireland may potentially default on its sovereign debt. However, much of this downward momentum can be attributed to the currency pair breaking the significant 1.2750 mark. Once this support line was crossed, many traders automatically sold off the EUR, helping to compound its losses. The EUR/USD closed down on the day at 1.2649 against the Dollar.

Also fueling the losses for the EUR is the potential for renewed Interest Rate cuts by the European Central Bank (ECB). It appears the market has priced into the EUR/USD a rate cut by the ECB in their meeting next month. The question is now open as to how much will that rate cut be?

Today we will have the release of the German ZEW Economic Sentiment survey. This month the indicator is expected to improve slightly, though the price momentum of the currency pair is working against it. Look for the pair to continue its slide to the 1.2600 level.

JPY – Japanese GDP Tumbles, Finance Minister Resigns

The Japanese economy has now experienced declining GDP for the third consecutive quarter. GDP for the fourth quarter last year fell 3.3%. Exports also fell a staggering 14%. This helped to send the USD/JPY higher by almost 1% to 92.43.

In an unrelated event, Japanese Finance Minister Shoichi Nakagawa said he will resign from his post. The resignation stems from his unusual behavior at the G7 summit. Some attribute his bizarre behavior at a press conference because he was under the influence of alcohol. This is a serious setback for the Japanese government that has already lost much of the confidence of its citizens to bring the country out of a recession amid the global financial crisis.

Forex traders should be looking forward to Thursday’s Overnight Call Rate from the Bank of Japan (BoJ). No change is expected to take place with Japan’s Interest Rates, but the speech from the bank’s governor could provide insight for the future direction of the Japanese economy.

Oil – Crude Oil Fails to Rally with the Dollar

Coming on the heels of a large rally this past Friday, Crude Oil looked for price direction but could only find itself range trading. The price rally as seen from the impending approval of President Obama’s economic stimulus plan was not strong enough to carry over into the new trading week. Surprisingly, today’s price rally in the Dollar was also not enough to push Crude Oil higher.

More fundamental data that may hurt Crude Oil is due to be released on Friday as U.S. Crude Oil Inventories will be reported. It is widely expected for the inventories to increase amid the global economic slowdown. The price level of $30 a barrel doesn’t seem so unreasonable any more.

Technical News

The price of this pair appears to be floating in the over-sold territory while the hourly chart’s RSI is indicating that an upward correction may be imminent. The upward direction on the 4-hour chart’s Momentum oscillator also supports this notion. When the upward breach occurs, going long with tight stops appears to be the preferable strategy.
The typical range trading on the 4-hour chart continues. Both the hourly RSI and Slow Stochastic are floating in neutral territory. However, there is a fresh bullish cross forming on the daily chart’s Slow Stochastic indicating a bullish correction might take place in the nearest future. In that case, traders are advised to swing in after the breach takes place.
A bearish cross on hourly chart’s Slow Stochastic implies that a downward correction might take place in the nearest time frame. The 4-hour chart’s RSI is floating in the over-bought zone, suggesting that the upward trend might be out of steam. Going short with tight stops appears to be the right strategy today.
The daily chart is showing mixed signals with its Slow Stochastic fluctuating in neutral territory. However, the hourly Chart’s RSI is already floating in the over-bought 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 significantly in the last month and peaked at $959.40 for an ounce. However, the hourly chart’s RSI is floating in an over-bought territory suggesting that the recent upward trend is losing steam and a bearish correction is impending. This might be a good opportunity for forex traders to join this bullish trend.