11/12/'07 - US Interest Rate Statement On Tap

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Economic News

USD

The USD depreciated against most major currencies on Monday for the 3rd consecutive session, ahead of today's widely expected FOMC Interest Rate Statement. Also, yesterdays' data on U.S. Pending Home Sales for November showed an unexpected gain and gave the greenback a modest boost.

Markets have recently pared back aggressive U.S. rate cut forecasts, with analysts citing more optimism that the Feds' action will be enough to prevent severe fallout from market volatility. Analysts estimate that the U.S. economy will slip into a ``mild'' recession next year, essentially predicting a downturn for the world's largest economy. Nevertheless, it is expected to pick up as early as the second half of the next year. Meanwhile, the depreciating dollar has helped American exports rise to record highs in the last 7 months. The U.S. trade deficit narrowed to $56.5 billion from the record $67.6 billion in August 2006 as a falling dollar made American goods cheaper in foreign markets.
Today, all eyes will be on the Interest Rate Statement from the Federal Reserve. Futures fully reflect a 0.25% point easing in the Fed funds rate to 4.25% from 4.50%. Chances of a bigger move have shrunk following a string of somewhat stronger-than-expected economic data. However, lower expectations for such a big rate cut have left the USD back in a downward trend.

To summarize, the market is already reflecting the expectation that the Fed is going to cut. Given all of the dovish potential surrounding the upcoming FOMC meeting, we expect the USD to remain relatively weak before the rate decision.

EUR

The EUR continued its rally yesterday as traders were looking ahead to today's U.S. Interest Rate Statement. During yesterdays' late New York session, the EUR was up 0.4% at $1.4712.

The EUR got a boost last week as comments by ECB President Jean-Claude Trichet left open the possibility of higher rates next year as a result of growing inflation. Comments made yesterday by ECB policy makers, to the affect that the Euro-zone inflation could be higher in 2008, as remarks once again reaffirmed the view that the European Central Bank is not likely to ease current trends in the near future. The EUR is also benefiting from these inflation risk warnings, as we can recall in the month of October, exports actually hit a record high in Germany, bringing the EUR above 1.45 for the first time. Today, we await the release of the German ZEW survey, which is expected to drop to a new 15-year low.

JPY

Yesterday, the JPY traded close to a one-month low vs. the USD and the EUR on speculation that the Fed will cut interest rates today, encouraging investors to buy higher-yielding assets funded by loans in Japan. The Japanese currency yesterday touched the weakest point since Nov. 9 against both the EUR and USD as it traded at 111.71 per USD and 164.35 per EUR at 16:00 p.m. in Tokyo.

Today's' Fed announcement might be a very critical inflection point for the rest of the year. If worries of a global growth slowdown resume, we could see a renewal of the equity sell-off and JPY crosses could come under pressure again. On the other hand, if a deeper U.S. downturn will be avoided; further gains of higher-yielders are likely to be spurred. The only news to be released from the Japanese calendar today will be the Corporate Goods Price and Current Account indices data. Both of the indicators are of a relatively minor importance and will probably not have a significant impact on its currency. Instead, traders' attention will be focused today on the U.S. Interest Rate announcement and on its possible outcomes.


Technical News

EUR/USD

There is a bullish configuration forming on the 4 Hour chart. The volatility is high and the EUR/USD is in a consolidation stage, especially after the pair broke the 1.4740 resistance level. The price should continue to move upwards in the 1.4700-1.4800 range. As it seems, the bullish pressure will continue to gather momentum at least until the weeks end.

GBP/USD

In the past few days the pair is going through a choppy session, and is giving mixed signals on the hourly level. The daily chart is showing massive bullish formation, and it looks as if the pair is heading toward 2.0500 again. A preferable strategy might be going long for the short run.

USD/JPY

A bullish flag is forming on the 4 Hour chart which might take this pair to 112.00. Slow Stochastic shows a positive divergence which strengthens the possibility of an upcoming bullish trend.

USD/CHF

The pair shows consolidation around the key level of 1.2010 which has proven to be a very significant level. A preferable strategy might be to wait for the oversold hourly levels as traders should pay close attention to the 1.1300 level to unwind before taking a long position.


The Wild Card

Gold

Gold broke the 812.30 resistance level. Gold is in an uptrend supported by 1 Hour exponential moving averages as the volatility is high. Bollinger bands are tightened. We should expect to see a bullish configuration today. 1 Hour and 4 Hour Elliott patterns are implying that Gold should gather momentum today. The target is expected to hit 810. This provides forex traders with a great opportunity to go long on a very healthy uptrend.