Over the past 24 hours, the USD has drifted lower against the EUR and GBP on diverging interest rate outlooks among the three respective central banks. The EUR extended its gains against the dollar after Friday’s weaker-than-expected US payrolls report. The single currency currently hovers above the 1.36 handle against the dollar. Today’s currency market is quiet as trading volume is light during the UK public holiday.
In interest rate news: the Fed meets on Wednesday and is seen keeping rates steady at 5.25%. The Bank of England is expected to lift interest rates from 5.25% to 5.5% on Thursday, which will be the first time that British interest rates move above those in the United States since January 2006. The actual hike may cause another spat of USD. Meanwhile, the ECB (European Central Bank) is likely to leave the benchmark rates unchanged at 3.75% at their meeting on Thursday. However, the market focus will be on the post-conference talk by the ECB chairman Trichet and look for any signal of a June rate increase.
Many analysts forecast that the dollar will rebound next year along with the U.S. economy. The dollar will strengthen to $1.30 by the end of 2008, according to the median forecast of 47 analysts surveyed by Bloomberg News through May 4. The U.S. economy will accelerate to a 3% growth rate in the first half of 2008, according to the median forecast in a Bloomberg survey on April 10.
The decline in the dollar has helped trim the U.S. trade deficit. The shortfall in the current account, the broadest measure of trade, has shrunk to $195.8 billion in the fourth quarter, equivalent to about 6% of the economy, from a record 7% in 2005.
The US dollar is visibly weaker today, but trading has remained exceptionally quiet with the EUR/USD trapped within a 35 pip trading range for the past 24 hours. Even though Japanese traders are back in the market, London traders are out on holiday today. Therefore, the activity will not begin to pick up until tomorrow, when currency traders begin to lay down pre FOMC trades.
The only piece of US data which was released yesterday was consumer credit, which increased by a much stronger than expected $13.5 billion from $3.0 billion however with no significant impact on the market. The focus of the market this week is central bank meetings starting with the Federal Reserve meeting tomorrow. The dollar is treading water going into the meeting since it is unclear whether or not the Federal Reserve will adopt a less hawkish tone. They face a very difficult decision with average gasoline prices hitting a record high at a time when economic growth is beginning to falter. Non-farm payrolls on Friday were weak and the effect was reflected all across the board. First quarter GDP was the slowest in the 4 years while the housing market is beginning to give way. The tug of war between inflation and growth gives the Fed little room to alter the FOMC statement. Even though we think that recent data warrants more cautionary comments on growth, the Fed will most likely wait for a few more weeks of data to ensure that the deterioration in growth is continuing before changing the tune of their statement. Bernanke has often put inflation ahead of growth and for the time being, we do not expect this to change. There is no doubt that the central bank will keep interest rates unchanged at 5.25 percent. If the statement does remain unchanged, expect the US dollar to recover. In the off chance that they acknowledge the weakness in growth, we could see the EUR/USD target 1.3700.
EUR strength today can be credited to multiple factors. First and foremost, Japanese traders finally had a chance to react to the softer US labor market number from last Friday. Secondly we had stronger German factory orders to compound the bullishness. Even though a number of economic releases are beginning to show the country’s vulnerability to the strength of the currency, just as many pieces of data have shown the country’s resilience. Yesterday’s German factory orders were a perfect example. For the time being, the manufacturing sector is holding up well and the numbers indicate that the sector is continuing to boom. This suggests that we could see a stronger German industrial production number today as well. Finally, Sarkozy won the French elections 53% versus 47% over Royal. The election results led to a mild EUR rally. As long as there are no major surprises from the Federal Reserve, the Euro should remain above 1.3550 going into the ECB interest rate decision as traders look forward to further rate hikes in June. Meanwhile the Swiss unemployment rate fell from 3.0% to 2.9%. The market was looking for a larger improvement, but nonetheless the jobless rate has moved to a 12 month low, reflecting a healthy labor market.
Even though Japanese traders are back in the market, we have seen little cohesive price action in the Yen crosses. AUD/JPY and GBP/JPY were up yesterday, but currency pairs like EUR/JPY, USD/JPY and NZD/JPY are down.
Aside from the rally in GBP/JPY, the movements in the yen crosses have been limited as the Dow Jones Industrial Average trades up for the 24th trading session out of the past 27. We are heading for a near break that is waiting only for the trigger. Coincidently, there are a number of factors brewing that could trigger a breakout, The US House of Representatives Trade subcommittee will be hosting a hearing on currency manipulation. China and Japan are the most prominent potential violators which means that any critical comments about excessive undervaluation of the Yuan or Yen could lead to strength in either currency. Like the Dow, the Shanghai stock index has also hit a record high. China may opt to pacify the situation by engineering speculation of potential moves to cool the rally. If you recall, the last time we had similar speculation, the Chinese stock market dropped 9 percent, triggering a wave of selling in the yen crosses and in the Dow.
On the 4H chart, an Eliot Wave pattern is establishing where the fifth wave is to test the 1.3620 (Fibonacci) and then the A wave will form and test the 1.3590 support level ,the end of the Eliot Wave pattern, suggesting this pair should continue to consolidate near 1.3580.
In the last 10 hours a tight channel was formed between 1.9920 - 1.9974 waiting to be breached when a breakout of those boundaries will boost this pair to the correlated direction.
On the 1 H chart a rising wedge can be observed and it might be a sign for an upcoming bearish trend. RSI and Slow Stochastic are sailing in neutral territory and need to be followed for those seeking another signal which may verify the bearish trend. We can also notice that the same pattern is established on the 15 M chart which strengthening the conjecture of an upcoming bearish trend.
The pair is square in the middle of its daily range at 1.2118 (between 1.200 and 1.2280). We expect consolidation to continue while daily indicatory are neutral. Intraday traders may enjoy the reversal brewing for short term profits.
[B]The Wild Card
Although the pair is consolidating now for almost a week, a breakout is imminent. Any move above 239.80 should signal a move to close the gap from mid January. As such, we suggest monitoring the pair today and tomorrow for any signs of movement. Forex traders should opt for an upside breakout that could reach as far as 214.20.