Monday’s releases from the US markets, which showed that US Existing Home Sales went down by 0.2% in July, caused the greenback to be traded mixed against most of the major currencies. The weak housing figures are raising many doubts and concerns about the health of the world’s largest economy. Lower home values have left Americans feeling less wealthy. Investors are waiting for the speech on “Housing and Monetary Policy” by Fed Chairman Ben Bernanke this Friday, which will probably offer a few hints about the future directions of the Fed’s monetary policy. As it seems at the moment, the housing market correction could take longer than expected and that could weigh on expenditures going forward.
It should be noted that the sub-prime market is just 4% of the overall real estate market, and its escalating effect is sometimes overwhelming. This ongoing housing problem makes it very difficult for Americans to tap home equity to finance spending. A slowdown in hiring and slimmer pay raises might weaken consumer sentiment and purchasing power as overall economy growth slows. Sales of second hand houses fell in July for the fifth month in a row, as the figure came in the lowest in almost five years, while the surplus of those homes rose to a 16-year high. The labor market shows signs of weakening. Unemployment rose in July to 4.6% from 4.5%. Job growth slowed to 92,000 last month from 126,000, down from last year’s average of 189,000 a month. These are quite concerning figures with which the US economy must deal at the short run.
As for today, there is no major news releases expected to come from the US, and the greenback’s is floating in a cloud uncertainty. The following two days are packed with major events and should probably shed more light on the Greenback’s future behavior.
Yesterday, the Euro slipped after the IFO Business Climate Index was published in Germany, the country which is considered to have the biggest and strongest economy in Europe. The IFO Business Climate Index fell to 105.8 points in August from 106.4 in July, the third consecutive monthly decline.
In addition the M3 Money Supply y/y index was published yesterday, as the data showed that the M3 money supply grew 11.7% in July year-on-year, up from a 10.9% year-on-year growth rate in June and above expectations for an 11.1% rise.
During the next month the ECB is expected to raise its key interest rate to 4.25%, but as it seems at the moment this move is not too certain after yesterday’s meeting in which the president of the European Central Bank, Jean Claude Trichet, participated in Hungary. During his speech Trichet said that the ECB was not pre-committed to any rate increase at its Sept. 6 meeting. Trichet specified that his monetary policy assessment made at the Aug 2 rate-setting meeting, was made before the recent market turbulence and would be re-evaluated. On the other hand, The ECB has said it expects a significant rise in inflation toward the end of this year and early in 2008. The bank defines price stability as an inflation rate of just below 2%. Most of the trader’s focus will be on the US markets in the following two day, as most of the important data will be coming from there.
Yesterday the JPY was very volatile and strengthened for the second consecutive day against the USD. That means that investors are still refraining from the risky carry trade strategy of selling the low-yielding Japanese currency to invest in higher-yielding ones. The slowing US economy will certainly weigh on the greenback, which may continue to fall to 114.00 against the JPY. The biggest JPY move yesterday was seen against the NZD which is a preferred currency for carry trades. The JPY is the best performer among the 16 most-active currencies this month as U.S. mortgage defaults caused stock markets to drop and banks to limit lending. There are no major news expected to come from Japan today, as most of the important data such as the CPI and Manufacturing PMI will be released on Friday.
The pair is now trading around 1.3600 which is the 50% Fibonacci level of the 1.3850/1.3360 move. If a breach up through that level will occur, we should see the pair initiating a further bullish move into the 1.3650 move. The daily chart is supporting the bullish notion, as the slow stochastic floats around 40, which indicates some more room to extend up.
The cable is floating at the upper levels of the downward channel that is forming on the daily chart. Together with the slow stochastic and RSI which are both at the 50 level, a bearish signal was created with the next target price located 1.9960. The 4 hour chart is showing a slight oversold level which might sustain the move down in the short term.
The 4 hour chart is showing two consecutive green bars, and the slow stochastic is showing two bullish crosses under the 20 level. The RSI has violently crossed the 20 level from above which strengthens the notion that in the short run, a reverse move is imminent. Traders should pay attention to the fact that the dailies are still bearish, and there is still more room to go down on a longer time scale.
The daily chart is showing that there is great uncertainty in the pair’s movement, as most of the recent bars on the daily chart are wide doji. This indicates that although there is some price movements, the open and close price are very similar. There was an attempt to break through the 1.1960 level again yesterday, and it failed, which means that the support level is still very strong. The hourlies are showing slight bearish momentum, and in general the trend is unclear.
The Wild Card
There is a bearish channel forming on the daily chart, as the gold is floating on the upper level of it. The slow stochastic has completed the cross above the 80 level, which validates the move as bearish. This provides Forex traders with a great opportunity to enter a short position with great bearish momentum.