[B]Economic News
USD[/B]
The greenback fell sharply against most of the majors yesterday after the Fed surprised the world by deciding to cut both the Federal Fund Rate and the Discount Rate by 0.75% ahead of its next meeting on Jan 30. The Fed Fund Rate, which is the U.S inter-bank lending rate, was slashed from 4.25% to a surprising figure of 3.50%. This aggressive cut is just another in a series of last ditch attempts to help the struggling U.S economy avoid a recession by alleviating the underlying weakness that exists in the housing sector and the broader economy. Therefore the greenback depreciated sharply on the back of this rate cut because investing in the U.S economy is now less attractive to investors, so there should be a fall in the inflow of foreign funds especially now that the interest rate in the U.S has fallen below that of Eurozone, which is still at 4.00%. However carry trades and equity markets were boosted on the back of this news as investors viewed the Fed’s robust attempt to stimulate the U.S economy as a positive indication that there could be a future rebound in the U.S economic outlook. Therefore the greenback and most of the other high yielders appreciated against the JPY yesterday. Now although this monetary expansion by the Fed will boost consumer spending significantly and therefore try to solve the problem of the housing sector and the credit crisis, the key question on traders’ minds is whether the greenback will recover on the back of a more positive U.S economic outlook. In our opinion, the U.S Trade Balance remains the missing piece in this complex puzzle as although the greenback has been weakening against the EUR for the latter part of 2007, U.S exports only gained fractionally on the EU and therefore the Fed can now only hope that this will change dramatically as the U.S trade deficit continues to widen. So a strong greenback is not at the top of the Fed priority list at the moment as they are using all means available to minimize the risk of an economic slowdown.
Nevertheless, many analysts believe that towards the second half of 2008 the U.S economy will climb out of this deep pit and it will be accompanied by a sustained USD rally. The Fed will also be keeping a close eye on inflation as although it is expected to remain moderate over the next few months, this aggressive rate cut could cause inflation to spike especially if we see an overreaction in consumer spending. Also the Fed’s objective to rebound the U.S economy will face a serious setback if commodities continue to rise any further.
Looking ahead, today there is no significant U.S data expected and the greenback should consolidate against most of the majors especially after yesterday’s sharp depreciation, as traders will begin to look ahead to Thursday’s key U.S Unemployment and Housing figures. However the greenback may still face some volatility today as a result of some key data releases from the Eurozone and UK. The short term outlook for the greenback remains very dark indeed, as the market prepares itself for another possible 50bps rate cut when the Fed meets next on Jan 30.
[B]EUR[/B]
Earlier in the week the EUR was struggling against the greenback after the release of the weak Eurozone and German ZEW Economic Sentiment coupled with Monday’s soft German PPI figures. However the resilient EUR rallied back yesterday on the back of the U.S Fed rate cut and it managed to pull back most of the previously lost ground . The current EUR rally can be completely attributed to the disastrous state of the U.S economy because the ECB is growing more dovish with regards to its future interest rate policy, which is diminishing the previous underlying strength of the EUR. Now although the strong EUR is causing cracks to appear in the Eurozone economy it is still in a far better state than in the U.S. So with the Fed expected to make further rate cuts at the end of the month we could see the EUR once again targeting all time highs against the greenback.
Looking ahead, today we are expecting the European Manufacturing and Service PMI figures, which measure the activity level of purchasing managers in the manufacturing and services sector, respectively. Both these figures are expected to release slightly weaker than last month but still with a reading above 50, which indicates expansion. Also President Trichet will speak today and it will be closely followed by investors, particularly after yesterday’s events, because his speeches can sometimes cause market volatility as traders react to clues regarding future monetary policy. The near term outlook for the EUR, in stark contrast to the greenback, remains bright and most analysts believe that it will once again head towards the 1.5000 level against the USD. However it may slip slightly today before resuming its upward momentum as the market digests yesterday’s rate cut causing some temporary greenback consolidation.
[B]JPY[/B]
Yesterday the JPY was the only major currency to weaken against the greenback as the rate cut by the Fed induced an increased risk appetite among investors, thereby prompting carry trades. This rejuvenation of carry trades may continue for a bit longer, as earlier today during the Asian trading session, Asian stocks managed to rebound after a sustained sell-off on the back of yesterday’s Fed rate cut. Nevertheless, we are now beginning to see the JPY crosses declining once again, so it may be wise to stick to the mainstream opinion that the resumption of carry trades was only a temporary phenomenon. The main news from the Japanese market today was the Interest Rate Announcement that remained unchanged at 0.50%. However BoJ Governor Fukui hinted in his speech, that followed immediately after the rate announcement, that the next move of the BoJ will be to raise the key benchmark rate. This could strengthen the JPY in the longer term. However with the Fed expected to make another rate cut towards the end of the month, this could alleviate equities and push the JPY lower. Traders should also closely follow the release of the Japanese CPI figures later this week as it will shed more light in determining the future monetary policy of the BoJ, whose hands have been tied in the past with regards to hiking rates as a result of negative inflation or so-called deflation.
[B]Technical News
EUR/USD[/B]
After bottoming out at 1.4400 the pair is in the midst of a correction move that already broke the key Fibonacci level of 1.4584. All daily oscillators are in a bullish formation, and the hourlies are showing that there might be a moderate bearish move before the bigger bullish trend resumes.
[B]GBP/USD[/B]
The 4 hour chart is showing the first signs of an additional bearish move after the correction that topped a bit above 1.9600. The daily slow stochastic is regaining a bearish formation, and the daily downwards channel indicates a continuation of the main downtrend that was initiated at the 2.1000 level.
[B]USD/JPY[/B]
The pair is trading in a range for the past few days, and shows no distinct direction after a very massive bearish move. At the moment the hourly study is giving out mixed signals and the daily chart is showing moderate bearish momentum. It appears that waiting for a clearer signal or a significant break in either direction, might be the smart move for this pair.
[B]USD/CHF[/B]
There is a bullish cross forming on the 4 hour chart indicating that we might see a delicate move before the next massive bearish move returns. The daily chart is very bearish, which makes it preferable to sell on highs. The next target price is an additional break through the 1.0900 level.
[B]The Wild Card
Crude Oil
[/B]
There is a very strong bearish channel on the 4 hour chart as crude oil now floats at the upper level. There is a fresh bearish momentum being created as the RSI and slow stochastic clearly indicate. This is a great entry point for forex traders who are looking for a swinging move with plenty of room to run.