Yesterday provided us with a mix day of data which was published in the US and led to the strength of the USD while a reduction was expected. Data such as: Durable Goods Orders, Core Durable Goods Orders and Crude Oil Inventories. The USD has strengthened mainly due to the FOMC meeting and despite the larger than expected drop in durable goods orders in the month of May from 1.1% to -2.8%, but as it seems, the American federal reserve is not going to decrease rates in the short term the level of the inflation which exists in the US market. The Federal Reserve does not have much choice other than to keep the tone of the statement unchanged in order to tame the stock market.
The federal reserve has to deal carefully with the issues of the housing market and inflation. A bigger focus on housing market problems will definitely lead to more pronounced dollar weakness against the Euro than the Japanese Yen because the market anticipates another interest rate hike in the short run from the European Central Bank this year while shorting USD/JPY would require paying hefty interest.
Also yesterday, the Crude Oil Inventories data was published. The oil inventories fell as low as 1.6M from 6.9M, but not surprisingly, Oil prices jumped over 1%. Crude prices are standing now $1 shy of its 9 month high.
Today at 19.15GMT the interest rate statement will we published. As it is predicted in the market, U.S. central bankers will leave interest rates at 5.25%.
The EUR may be bolstered by speculation a German report today will show unemployment held at a six-year low in June, backing the European Central Bank’s case for raising interest rates as economic growth threatens to fuel inflation. Europe’s single currency may snap a three-day losing streak against the dollar as Germany’s jobless rate (8:55 a.m. GMT), adjusted for seasonal swings, stayed at 9.2% for a fourth month in June. Traders expect another rate hike, coming from the ECB since the inflation pressures were expended and there is a threat on the inflation’s destinations in the Euro Zone. We are expecting a significant strengthening of the EUR among the majors in the upcoming week.
During the last three days we could clearly notice the strength of the Japanese Yen against most of the currencies, but especially against the greenback and we could see that Japanese want to reap the benefits of JPY weakness. This move can be attributed mainly to Japan’s minister of finance, Koji Omi, after his speech in which he announced, two days ago, that investors should not go blind after the weakness of the Japanese currency especially for the long term, and in addition because of the fact that many traders added many Japanese investment trusts in foreign assets, which are scheduled to go on sale at the end of the month. Today, at 00.50 GMT the Industrial Production data was published in Japan. The Industrial Production dropped from -0.2 to -0.4 for a third straight month in May, the longest losing streak in almost two years and according to this fact the market reacted dramatically against the Japanese currency. The JPY declined against 14 of the 16 most-active currencies. This situation may cause a delay in the intentions of the bank of Japan regarding raising the interest rate in the next month, which at the moment stands on 0.5%.
The Bank of Japan searches first for economic stability and growth in order to make a certain step of raising the interest rate. Japan’s economic growth will probably slow to an annualized 1% in the second quarter from 3.3% in the first three months of 2007. Japanese makers of chip-making equipment reported smaller orders than sales for a second month in May, suggesting the pace of investment in the gear is slowing. The book-to-bill ratio, a measure of industry health, held at a 13-month low of 0.94, signaling equipment makers received only $94 in orders for every $100 in sales and many investors are restoring carry trades. The yen fell as low as 123.37 per dollar and then recovered to 123.19 at 9:39 a.m. in Tokyo from 123.20 before the release. The Nikkei rose 81.40, or 0.5%, to 17,930.68 as of 10:20 a.m. in Tokyo. The broader Topix index added 8.36, or 0.5%, to 1749.44. A weaker yen increases the value of Japanese exporters’ dollar-denominated sales when converted back into local currency. The dollar may benefit from speculation the Federal Reserve will say the U.S. economy is improving after a policy meeting ends today, easing concern a housing slump will weigh on growth.
On the 4 H chart we can see that the bullish trend which started yesterday is out of steam and a reversal is occurring at the moment. It is important to notice the neutral channel which is establishing over the last four days. Slow stochastic is due to cross at 90 and momentum at 99.9231 implying an upcoming bearish trend which will take this pair to test the 1.3429 Fibonacci (0%) level.
Daily chart implies an upcoming reversal with RSI at 86 and Slow Stochastic crossing at 93. On the 4 H chart, Slow Stochastic crossed at 91 which strengthened the assumption of the upcoming bearish trend, it seems that this pair will test the 2.0038 before a reversal will take place so going short would be the preferable strategy.
A bullish flag is forming on the 4 H chart which might take this pair to 123.73 Fibonacci (76.4%). Slow Stochastic shows a positive divergence which strengthens the possibility of an upcoming bullish trend.
It seems that the bullish trend is delaying however eventually will take place. On the 4 H chart a tight neutral channel is forming and this pair will try to breach the support barrier which is located at 1.2271, in case of a breakout, this pair will consolidate at 1.2232 Fibonacci(23.6%) and then going long would be the preferable strategy.
The Wild Card
Foreign currency traders should pay attention to gold today: on the daily chart a bearish rising wedge is forming however has not completed ,in case of completion we might witness a reduction in gold value to 641.33 per ounce within the next 3 days .