The most significant forex trading news to be released from the US yesterday was the Feds key interest rate statement which left the interest rate unchanged at 5.25 %. Before the release of the statement the greenback experienced a slight revival against the majors as it was widely expected that the Fed would reiterate their robust stance on controlling inflation. This was indeed the case as the Federal Open Market Committee stated yesterday that inflation remained its primary concern and therefore the greenback extended its earlier gains particularly against the EUR. The Fed stated that the resilience of the labor market coupled with rising incomes will keep economic growth stable. Therefore although the Fed has kept its key benchmark rate unchanged in over a year, yesterday’s statement was interpreted by investors as being hawkish as the Fed indicated that it will not cut rates in the near future even with the prevailing housing and credit concerns. Traders must pay close attention to any future comments from the Fed regarding its monetary policy as it seems that the Fed is trying to temporarily reassure investors that there is an underlying strength in the US economy and that growth will continue. However the Fed may very quickly change their tune in future statements as the sub-prime crisis and credit woes could drive the US economy into a recession if it is not aided by a rate cut from the Fed.
Today there is no market moving news expected from the US so we should see the greenback consolidate on yesterday’s gains however the market remains edgy on the back of the Fed statement so investors, particularly this week, should pay close attention to future US news releases as there will be heightened volatility which may put the USD back onto the familiar slippery slope.
Yesterday the EUR lost ground against the USD on the back of the Feds interest rate statement which was interpreted as being hawkish. The only news which was released from the European market yesterday was the German Industrial production which released in negative territory at -0.4 %, well below the expected figure of 0.4 %. However this did not have much of an impact on the EUR as traders shifted their attention to the Feds statement, therefore most of the EUR movement was dollar centric. There is no real market moving news to be released from the Euro-zone for the rest of the week, so with the Fed maintaining its current interest rate level and the ECB expected to raise rates in September we should see the resilient EUR target a fresh bullish surge. However whether future US indicators support the Feds decision to keep rates on hold could prove to be a key in determining the direction of the EUR/USD pair.
Elsewhere, the BoE will release its inflation report today which should provide the market with further indication to its future monetary policy. Traders should pay close attention to this report as there is some confusion in the market as too how many future BoE rate hikes should be priced in. There will be volatility on the back of this report and the GBP could lose some ground in choppy trading as market forecasts are heading towards a single rate hike instead of two further rate increases to 6.25 % as was initially expected. However the inflation report will have a significant impact on these expectations.
Yesterday the US stock market dropped ahead of the Fed statement and this drove a bullish JPY surge as it reached the 117.98 against the greenback. However the JPY strength was premature as the greenback combined with the US stock market rebounded on the back of the interest rate statement. Also speculation on gains in Asian stocks which will further encourage carry trades caused the JPY to depreciate sharply against the high yielding currencies. Also earlier today in the Asian trading session the JPY extended its losses as Core Machinery Orders came in significantly below expectations at -10.4 %. However there is light at the end of the tunnel for the JPY and it may just be able to consolidate its recent rallies as the Bank of Japan is planning to discuss hiking its key interest rate to 0. 75 %. The widening interest rate differential between Japan and the rest of the world has been a thorn in the side of the JPY, as this fact coupled with a rising US stock market has fuelled carry trades over the recent months. Therefore a rate hike by the BoJ could provide the JPY with some much needed reprieve.
The pair has been ranging in the past few days but it still gained no distinct direction. The daily studies are showing bearish signals and the hourlies are currently neutral. On the daily chart we may observe a forming Eliot wave structure. A preferable strategy might be to wait for the hourlies to deliver a positive signal, and look for a good entry point for a short position.
There is very distinct 5 Elliot wave pattern forming on the 4 Hour chart. The formation is now at the A B and C stage and close to completion. This trend may consolidate at 2.0165 at the end of it, and forex traders would have the chance to enjoy profit taking on dips and tops if they will identify correctly the reversals on this pattern. The general direction of the waves is bearish and targeted at 2.0100.
The Slow Stochastic on the 4 Hour chart implies an upcoming reversal as it crossed above 80 (clearly over bought territory). The long term moving average (weighted 21) is flat, which may note on an upcoming crossing between the short term moving average (exponential 3). In case of a breach through the daily pivot point at 118.62 the bearish trend might reach 117.65. It is assumed that the pair won’t be able to breach the pivot point and will most likely sail at 118.45 - 119.50
The Daily and the 4 Hour charts are implying a bullish trend continuation before a reversal will take place. On the long term the pair expected to test the 1.1985 Fibonacci level and in case of a breakout, the next target would be the 1.2073 Fibonacci level. It seems that going long will be a preferable strategy in the upcoming weeks.
[B]The Wild Card
On the daily chart a strong 5 Elliot waves pattern is establishing and the A B C waves are expected to take place and send the Gold to a $662.69 per ounce price. It seems like a great opportunity for Forex traders to take advantage of the situation.
This is a long term analysis which means that it will take at least one month to verify, and must be treated with great caution , as this is a very volatile instrument.