24/01/'08 - Will The Fed Cut Again?

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Economic News

USD

The greenback is floating in relatively quite waters, after the storm caused by the fed's surprise cut of 75 basis points two days ago. When taking a deeper a look at the USD behavior post cut we can see that the reaction of the USD was in fact softer than one would expect from such a radical move that was not seen since 9/11. This could partly be explained by the fact that the cut was partly priced in, as the crisis was quite strong and traders were expecting a massive cut. Now there is a certain argument amongst some traders about whether the Fed will again lower its rates by at least a quarter of a percentage point next week. Others said it would depend on how Wall Street would perform for the rest of the week until their meeting on Tuesday.

These extreme policy changes are aimed at boosting liquidity and easing the credit crunch, restoring confidence and encouraging consumers and businesses to start borrowing, investing and spending again to keep the world's largest economy from slipping into a recession, although many predict that a recession might be inevitable.

As for today there are two major economical events expected to come from the US, the first is Unemployment Claims which is widely expected to be released at 320K after a previous figure of 301K, and the second is Existing Home Sales that is expected to remain at the 5 Million level, and will probably not generate strong volatility that is usually expected from housing data at this poor economical period.

US Treasury Secretary Henry Paulson will speak today about risk and the financial system at the World Economic Forum, in Switzerland. The speech might generate some choppy price movements, as those speeches often do. It appears that if no other surprises will be pulled from the fed's sleeve, we should see the Greenback continue to drop as a part of the ongoing attempts to initiate the healing process for the American economy.

EUR

There are many opinions as to what the ECB can do in order to help the situation in the US to cause a bigger global turmoil that could eventually lead to a world crisis. A very vivid example was given a few days ago where most of the world markets fell in an average of 5-6%. The ECB's part in all this is very important, as a rate cut on their side might ease the pressure from the US, and cause the EUR/USD to return to normal level. It could be interesting to see how fast the ECB will comply with the need to cut the rates.

However, Trichet said yesterday that a rate cut was not to be expected, which will keep the EUR afloat for now. But as rates remain at 4% in Europe as rates drop in the US, the stock market crashes may cause a reversal of fortune for the EUR by way of a correction in the coming week.

As for today, the European calendar contains several interesting events such as the German Ifo Business Climate Index at 9:00 GMT which is expected to drop a bit from 103.00 to 102.3. slightly later at 9:30 GMT we should be expecting new from the UK housing sector in the form of the British Bankers' Association (BBA) Mortgage Approvals which measures the number of home loans issued by the BBA during the previous month, and might have some impact on the ongoing weakening GBP. European Central Bank (ECB) President Jean-Claude Trichet will also speak at the World Economic Forum, in Switzerland shortly after US Treasury Secretary Paulson, and strong price movement is expected in that time frame, especially in the EUR/USD.

It looks like the EUR will continue its path of strengthening today, as it will probably do until the end of this month when the feds will indeed make a very important decision whether the US rate will be cut again or not.

JPY

The credit crunch in the U.S. and the slow growth are causing the JPY to surge, clouding the outlook for the nation's exporters. The JPY gained 5% against the dollar this year, cutting the value of overseas sales. Half of Japan's shipments overseas are settled in U.S. dollars even though the country is relying more on China and other emerging markets for trade. Gains in the currency are already hurting exporters' earnings. Toyota Motor's annual operating profit falls about 33 billion yen for every yen that the currency gains against the dollar past 115, according to Credit Suisse Group. Toyota's shares have fallen 16% this year.

It looks as if the JPY is approaching a point where companies won't be profitable. Exporters say they can make money as long as the USD/JPY is weaker than 106.06. Japan's currency is already 8% higher than the level the nation's largest exporters based their profit forecasts on for the year ending March. Today, there are two Derivatives of the Consumer Price Index (CPI) expected to be released from Japan. The first is the Core CPI y/y which is expected to rise a bit from 0.4% to 0.6%, and the second is the Core Tokyo CPI y/y which is expected to remain unchanged at 0.3%. Both releases are due at 23:30, and will probably push the JPY further up, as we have grown accustomed to in recent times.


Technical News

EUR/USD

The pair is floating around 1.4600 which is a 76.4% Fibonacci level of the 1.3388/1.4960 move. A breach through that level will validate the next bullish move into the 1.4700 zone. It looks like going long might be the better choice today.

GBP/USD

The bearish channel formation is getting tighter and appears to be approaching the melting point. The cable is floating at the top barrier of the channel, and if a break above 1.9600 will not occur on the next attempt, it appears that the bearish channel will continue with strong momentum.

USD/JPY

The attempt to break the 105.00 level has failed and the pair now consolidates around 106.00. The 4 hour chart is showing a bearish slow stochastic, and the daily RSI indicates that another attempt to break the support level is quite imminent. Target price of 105.40 appears to be a valid target for the next move

USD/CHF

The pair is in the middle of a strong bearish move, as the 4 hour slow stochastic clearly indicates. The pair has established a strong support level at 1.0850, which means that a breach through this level might unleash a much stronger downtrend that could take the pair beyond the 1.0800 level quite quickly.


The Wild Card

Crude Oil

The bearish channel on the 4 hour chart continues with no exceptional breaks. Oil is floating at the upper level of it which could be a great opportunity for forex traders to get in a short position at a very early stage, before the touch at the upper barrier may send the Oil down again.