Yesterday the dollar managed to appreciate mainly against the EUR and the GBP, after weakening significantly in the last few weeks, during a relatively quiet day of trading. The main driver of the currencies strength was the investors covering of short positions in the dollar ahead of today’s Fed rate decision. The general sentiment in the market is that the Federal Reserve will keep interest rates unchanged but investors will be alert for any hints of a future rate cut towards the end of this year and this could bring about some dollar movement. The ongoing tug-of-war between growth and inflation in the US economy puts the Fed in a dilemma of whether to keep its tightening bias intact especially in the wake of the softer than expected April payrolls report and March PCE core deflator. The Fed’s main briefing indicators, which will be discussed during the meeting are:
Q1 GDP which is the lowest since 2003
Job growth (3 months average) the lowest since 2004
ISM manufacturing and services rebound in April
The inflation is still above the comfort zone
If the Fed continues to talk about the weakness of the economy, rather than the risk on the inflation side, and will come with more cautious towards the economy, that act will be seen as more dovish and then the dollar will likely weaken. The Fed’s tone will have to be very dovish to stop, what may turn out to be, the beginning of the long overdue dollar reversal. As such, we may very well see the dollar touching the 1.33 level against the EUR in the near future.
Yesterday, the only significant news coming out of the Euro-zone was the German industrial production, which released in negative territory. This fact coupled with unchanging annualized growth prompted the EUR on its downhill slide and it reached a low of 1.3516 against the dollar before edging back towards the 1.3545 level. The European currency fell all across the board as investors reduced their risks before two consecutive days of central bank announcements. Unlike the Fed, which is expected to keep interest rates unchanged, the European Central Bank is likely to boost borrowing costs in June and tomorrow, traders will be on the lookout for the use of the words �strong vigilance� in ECB President Trichet’s speech as the return of this key phrase will give a clear signal to the market of a further rate hike in June.
Without any significant data expected from the European markets today and the fact that the market is stalling to bring down the EUR lower ahead of the Fed and ECB meetings we should see the EUR hover at its current levels with a possible consolidation today.
Yesterday the JPY gained almost 0.2% against the USD and 0.65% versus the EUR as it gained ground against all the majors except for the AUD. The surge of the JPY was a result of speculative positioning and risk reduction ahead of the upcoming central bank meetings.
The JPY crosses sank as the Dow Jones Industrial Average (DJIA) drop was triggered and it fell to as much as 75 points intraday after trading up for 24 out of the last 27 trading sessions. Towards the end of Yesterday’s trading session the DJIA made a reversal and closed unchanged but this was still not enough for the yen crosses to make a significant pullback due to the renewed strength of the USD. The only news coming out of Japan today is the leading index, which measures overall economic health, is expected to come out strong aided by the Yen’s recent weakness. The JPY should hover today around its current levels as attention shifts towards today’s Fed meeting in the US and the ECB meeting in Europe tomorrow. Without any further significant news to be released this week from Japan, JPY movement will be pegged to the USD and the EUR and it will also affected by the performance of the US stock market.
It should be noted that today, in Washington, three separate committees will hold a hearing to look at the effects of currency manipulation in the US economy. Those comities are going to consider whether the Chinese Yuan and the Japanese Yen are artificially under-valued relative to the US dollar, and whether the US should take any action.
Some of the actions that are going to be considered are dealing with Japanese Yen, a main issue which has been already discussed a number of months ago in the G8 meeting. Japan has many different policies that keep the Yen very week including very low interests rates, and in China’s case, the country only hedges its currency, and the issue of the very cheap work force that the US cannot compete with. Although we do not believe that these hearings will have an immediate affect on the JPY or more specifically on the USD/JPY pair, it could trigger a number of events for the coming weeks which may shape the direction the currency takes.
[B]Technical News [/B]
1.3548. the EUR trend for today is going to be pretty much the same as yesterday, which is bearish. The EUR has broken support at 1.3592. At the moment volatility is decreasing, especially after yesterday’s movement, and as it seems the momentum should continue.
1.9906. the GBP trend for today is going to be pretty much the same as yesterday, which is bearish movement. The GBP has broken its support level 1.950. At the moment volatility is decreasing, especially after yesterday movement, And as it seems the momentum should continue in the same direction.
119.75. This pair is being traded in a range between 119.50 and 120.30. For the moment there is no specific trend for the USD JPY and it is swinging around the exponential moving averages (EMA 50 and 100). The volatility is quite high. Bollinger bands are flat.
1.2174. After the last bullish movement, the USD CHF begins to consolidate. At the moment there is no specific trend for the USD CHF, and it is being traded between the 1.2090 and 1.2210 levels. The volatility is not high and Bollinger bands are tightened which may lead to a breakout very soon.
[B]The Wild Card [/B]
1.6492. After yesterday’s bullish movement the EUR/CHF should begin to consolidate. At the moment Bollinger bands are flat and the volatility is quit low. The recent bullish momentum should continue also today. Forex traders should opt for an upside breakout that could reach as far as 214.20.