Will Bernanke Save The Dollar From Further Losses?

The big day is finally here, with dollar getting the worst of both Asian and European session, with EUR/USD closer to 1.45 than ever before! Yesterday, we had consumer confidence, which printed again low number and therefore sparked a new wave of dollar selling all across the board.

With EUR/USD near 1.45 and GBP/USD above 2.0700 it will be interesting to see how the markets will react after the New York open, as we have a big bulk of economic data starting with the ADP report. This report will remind traders that whatever the outcome of today, there is still he risk of Non farm payrolls on Friday. After that, we have GDP out of the US, which again is forecasted bad and lastly Chicago PMI, the last news before tonight�s rate decision.

As we have said before, there is a lot of speculation regarding the outcome of today�s decision by the FED, with a cut of 25bps being the most likely one. Market analysts over the last few weeks, go over the data again and again and have concluded that Bernanke and pals will have to end up cutting at least once again, in order to calm the markets after the big turmoil. However, due to a record low dollar and risk of further crushing in the equities, there is common belief amongst traders that the bank might indeed give a cut to the markets but the discount rate instead of the fund rate. All those scenarios and speculations will be answered tonight, with expected wild moves all across the board. The only version that will give dollar a temporary lift will be if FED leave rates unchanged. However, even if that happens, dollar bulls won�t have the chance to celebrate much, as markets will be disappointed if FED doesn�t do anything and therefore continue to sell the dollar after the initial reaction. The whole thing is a vicious circle as we see, as whatever Bernanke does, it will potentially have negative effect in the markets.

The other big move today in currencies was in all yen related pairs, after Bank of Japan left the interest rates unchanged and President Fukui in his speech acknowledged the downside risks to the economy. These events lead to a massive sell off in the yen and we saw all carry trades being bid like there was no tomorrow.

The risk of further carry unwinds is always there, as another crisis in American economy can spark liquidation in all yen related pairs. 
If all data point out to further worsening of the US economy, we might see further dollar weakness and therefore EUR/USD accelerating to new highs ahead of the decision.

Nevertheless, we must be aware of the aggressive dollar sell off which is happening these days in the name of a possible Fed cut, because in the past when moves like that happened before the actual news, the reaction was the opposite after the news. So, there is a chance that the market will react in a �buy the rumor sell the fact� mode and the move up in both EUR/USD and GBP/USD can be reversed slightly after the actual release.

Whatever happens, everyone should be in front of their screens later on because one thing is for sure: trading will get volatile and exciting�