There was some positive forex trading news for the greenback yesterday as the headline US Producer Price Index surprised on the upside releasing at 0.6 %, beating the expected figure of 0.1 % and this rise in producer inflation increases speculation that the Fed will cut rates in the near future. There was more good news to follow for the greenback as the US trade deficit shrunk to 58.1 B. The market was expecting the trade deficit to rise from last months figure of 59.2 B to 61.0 B, so this surprisingly strong data was the main driver of the greenbacks bullish burst against most of the majors. The two key factors responsible for shrinking the US trade deficit is the drop in oil prices and the weak USD. The decrease oil prices means that the US is spending less on imports while a weak dollar is improving the US exporter’s ability to compete against the Chinese and US goods are gradually becoming a more preferable alternative to the foreign consumer. The greenback has been steadily pulling back lost ground against the GBP and the EUR in the last two days and yesterday’s weak UK CPI figures coupled with the growing investor speculation that the ECB will not raise rates in September contributed to the continuing decline of the GBP/USD and EUR/USD crosses. The US and European equity markets suffered further losses yesterday and although the USD managed to hold its ground against the JPY it did eventually begin to depreciate against the Japanese currency giving further indication that the market is beginning to experience the full extent of a carry trade unwind particularly with today’s looming hedge fund deadline.
Today volatility should remain high as there is a host of market moving data to be released from the US kicking off with the CPI figures that are expected to remain unchanged at 0.2 %. The other important data to be released today is the Empire State Business Conditions, TIC report, Industrial production and the Capacity Uitilization Rate. The USD has experienced a pile of negative economic data in recent weeks so we may be in for a downside surprise today. However with the credit woes also placing the EUR under pressure the greenback may be able to maintain its bullish run against the EUR and the GBP. It will be important for traders to identify a connection between the US economic data releases and their impact on the Fed’s future monetary policy.
A string of negative data releases from the Eurozone yesterday coupled with the spreading credit concerns further fuelled the growing sentiment that the ECB may be forced to leave interest rates unchanged in September. The German, French and overall Eurozone GDP all released below expectations at 0.3 %. Also Industrial Production released in negative territory at -0.1 %, well below last months figure of 1.0 %. This basket of negative Eurozone data is a further indication that cracks are appearing in the normally resilient European economy. Also investors will be paying close attention to the ECB’s approach in staving off the money market crunch as this will bear a significant impact on the ECB decision on whether to hike rates.
Today there are no significant news events to be released from the European market so any sharp EUR movement will be dollar centric. However it will also be important to follow how the equity markets react today as another decline could spark further risk aversion and then the EUR will continue its freefall versus the JPY.
The JPY is in a utopian phase as it continued to extend its gains all across the board yesterday. With the US and European equity markets taking another hit yesterday and with the problems in the credit market, the carry trade unwind is now fully rearing its head. The JPY should continue to strengthen particularly against the high yielding currencies as the credit concerns that started in the US are making a ripple effect and are negatively influencing the global markets. This in turn is creating a feeling of risk aversion among investors which is fuelling the current carry trade unwind. There is no important news to be released from Japan for the rest of the week but with the problems in the subprime sector being far from over, there should be further hedge fund liquidations and therefore carry trades will remain the name of the game in the near future. So it seems that the JPY is only now stepping into the bullring and we could see the Japanese currency gore its way to new heights in the next few days.
There are two bearish flags forming on the 4 Hour chart that sent the pair to 1.3483 which is a two month low. The daily chart shows that the bearish trend has not ended yet and sets 1.3437 as a significant barrier which probably slows down the current bearish trend. The Momentum Indicator is supporting this aggressive trend and traders should seek the upcoming reversal which may offer a good entry point for a short term buy position.
There is a bearish channel forming on the daily chart with a bottom barrier located at 1.9841. Traders should pay attention for a breakout as this pair is expected to consolidate at 1.9798. The 4 Hour chart supports the bearish trend continuance as the slow stochastic is clearly in over sold territory with a negative slope. A preferable strategy might be to go short on peaks.
A mild bearish channel is forming On the 4 Hour chart with 116.67 as a support barrier which is going to be tested, probably today. In case of a breach the pair might be in its way to 116.23. Going long might be preferable after the reversal will take place.
The pair is in the middle of a very intense up trend, which was initiated after a breach through the 1.2000 level has occurred. The slow stochastic shows an overbought status which indicates that a correction might occur before the uptrend continues. Target price appears to be 1.2220.
[B]The Wild Card
There has been a bearish flag forming on the 4 Hour chart, indicating that the momentum is still down. The RSI is floating around 50, which supports the notion that there is still plenty of room to run. This provides forex traders with a great opportunity to go short on a very solid downtrend.