The US dollar gained slightly on the euro Wednesday morning in New York, putting it on track to its first monthly gain versus the euro this year.

The greenback was helped by the possibility that an expected rate cut from the Federal Reserve today will be the last cut for the time being.

At just past 11 a.m. in New York, the dollar traded at $1.5563 to the euro while it had also gained in relation to the yen, to ¥104.4950.

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The yen was weaker on the session as the Bank of Japan held interest rates at 0.5 percent and gains in US equities markets increased investor interest in carry trades financed by the low-yielding yen.

The yen traded at ¥162.6255 to the euro, while its biggest declines were in relation to the Brazilian real and the Canadian dollar, to ¥61.598 and ¥103.3683 respectively.

The South African rand gained in relation to all major currencies on the session and had its biggest monthly gain in four years in April on speculation that the reserve bank there will hike interest rates when it meets next, up from a five-year high of 11.5 percent currently.

Also helping the rand was a reduction in South Africa’s trade deficit, which dropped from R5.8 billion in February to R5 billion in March on high prices for gold and platinum.

In late morning trade in New York, the rand traded at $7.5775 to the US dollar and at R11.794 versus the euro, while a rand was worth ¥13.808.

The Canadian dollar also strengthened in relation to all major currencies, mainly on the chance that US interest rate cuts are about to end.

It took 98.92 cents US to buy a Canadian dollar at late morning in New York.

 

German labour market posted better than expected results in March due to good weather, which favoured a shorter than expected jobs cut, according to the latest labor report by German Statistics.

In March the number of persons in employment increased 0.2% from February in seasonally adjusted terms, and 1.8% from March last year.

The ILO unemployment rate decreased to 7.3%, as level considerably lower than the 8.6% in March last year.
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The ongoing housing recession has led many to believe that the US economy is in the midst of a real economic recession, and the upcoming GDP report will go a long way to dispel or confirm such pessimistic sentiment.

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APR 30 US GDP Annualized (1Q A) (12:30 GMT; 08:30 EST) FOMC Rate Decision (18:15 GMT; 14:15 EST)   Expected:                           0.5% Expected:                      -25bps to 2.00%   Previous:                            0.6% Previous:                       -75bps to 2.25%

 

What Are The Markets Facing?   The ongoing housing recession has led many to believe that the US economy is in the midst of a real economic recession, and the upcoming GDP report will go a long way to dispel or confirm such pessimistic sentiment. The median consensus forecast call for the slowest quarterly GDP gain since the fourth quarter of 2002, but it is important to note that most do not predict a negative GDP release. A below-zero print would almost certainly produce a bearish tone in the US, as it would be clear proof that the world’s largest economy is in a stage of contraction and would quickly feed into expectations for the afternoon’s Federal Reserve interest rate announcement. On the other hand, a reading in line with expectations isn’t likely to spark much reaction as traders will be anxiously awaiting the FOMC decision. According to a Bloomberg News poll of 72 economists, an overwhelming majority is in favor of a 25bp cut to 2.00 percent. Indeed, futures have generally been in favor of such a move since the last policy meeting, though for a time, the markets had considered the possibility of a 50bp reduction. However, the combination of stronger-than-expected CPI figures and hawkish comments from various FOMC members was enough to erase the probabilities of an aggressive cut to 1.75 percent. Nevertheless, economic conditions clearly remain very weak and are likely to get worse, supporting the case for additional rate cuts. Furthermore, credit conditions remain tight and financial institutions continue to writedown billions of dollars in losses. However, a 25bp reduction will not be enough on its own to take the wind of the greenback’s recent rally, and if the FOMC’s policy statement indicates a pronounced focus on inflation rather than credit conditions, the financial markets, or the economy, the US dollar could actually rally as traders rush to price the potential for a pause in further rate cuts for the rest of the year.    Bonds – 10-Year Treasury Note Futures

Treasuries have managed to hold above support at the psychologically important 115-00 level, but given the hawkish, inflation-focused commentary from various Federal Reserve officials we’ve seen lately, it’s no wonder the bonds markets are moving in favor of no change in interest rates on April 30. The contract could see significant volatility on Wednesday as Q1 GDP will be released in the morning, followed by the FOMC rate decision in the afternoon. However, the status of risk aversion may be the key factor to watch, as a sharp drop in the equity markets could lead Treasuries to rebound toward the 100 SMA at 116-15. 

FX – EUR/USD   EUR/USD remains very heavy, and as we mentioned in the DailyFX FOMC preview, the “technical outlook for the EUR/USD pair reflects 5 waves down from 1.6018, confirming that an important top is in place.” However, the US dollar faces significant event risk on Wednesday as US Q1 GDP will be released, following by the FOMC rate decision in the afternoon. Uf GDP proves to fall negative, the pair could hold above support at the 50 SMA over the course of the morning. However, if GDP slows in line with expectations, price action for EUR/USD may be muted as traders will await the central bank news. The FOMC’s announcement could be pivotal, but a 25bp reduction may not be enough on its own to take the wind of the greenback’s recent rally. In fact, if the FOMC’s policy statement indicates a pronounced focus on inflation rather than credit conditions, the financial markets, or the economy, the US dollar could actually rally as traders rush to price the potential for a pause in further rate cuts for the rest of the year.    Visit our recently updated EUR/USD Currency Room for specific resources geared towards the US dollar.

Equities – Dow Jones Industrial Average   The Dow Jones Industrial Average has retraced nearly 50 percent of the drop from 14,198.10 to 11,634.82, as the index managed to break above resistance at the 100 SMA last Friday as risk appetite grows. Indeed, the confluence of the 100 SMA and the 38.2 percent fib of the mentioned bear leg has formed a zone of support at 12,613/35. However, upcoming US news could lead the DJIA down for a test of this zone as the FOMC is likely to cut rates on Wednesday, but issue hawkish commentary in their concurrent policy statement. Furthermore, traders should watch out of the Q1 GDP reading earlier in the morning, as a reading that misses expectations could spark volatility as soon as the US markets open. 

Written by Terri Belkas, Currency Analyst for DailyFX.com

Like the Euro, the British pound has been hit by weaker consumer spending.

The CBI distributive trades survey dropped to the lowest level since November 1992.  Although the Easter holiday and poor weather affected consumer spending, the primary reason why consumers are tightening their belts is the weakening housing market.  Conditions will be challenging going forward, which could force the Bank of England to cut interest rates again despite growing inflationary pressures.  This morning, BoE Governor King said that inflation will hold near their 3 percent target for longer than initially anticipated.  These hawkish comments conflict with the sharp drop in mortgage approvals and the possibility of major layoffs in the UK in the coming months.

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The anecdotal evidence for surging retail interest in forex is cropping up everywhere. Moreover, investors are no longer even limiting themselves to the spot market, utilizing derivatives to speculate on future exchange rates. In the UK, for example, 10% of investors intending to purchase real estate in the EU are utilizing forward agreements to hedge their exposure to the Euro, which has risen 10% against the Pound since the beginning of 2008. Evidently, prospective home buyers are hoping that the Euro returns to 2007 levels, which would significantly lower the cost of buying property there. However, if the Euro continues to appreciate, such investors could end up losing more than they bargained for. Homes Worldwide reports:

Even the movement in the markets over a couple of days can make the difference between owning a property and no longer being able to afford it.

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The Federal Reserve will probably announce a 25 basis points rate cut on Wednesday to 2%, to complete the seventh rate cut since august last year, pointing out to remaining concerns over the US economic slowdown.

Even though for some experts there is still a possibility of a surprising decision, the fear of entering a recession later this year, as Ben Bernanke recently warned, will probably turn the balance to the rate cut side.

The Fed is confronting a delicate economic context, there have been 232,000 job losses in the first quarter, and the University of Michigan Consumer Sentiment Index has slumped to the lower pace of the latest 25 years.

The main point of Wednesday’s event, nevertheless, will be the Bank’s statement, hints for affirmations about this rate cut to be the last one for a while, will be of special interest, as further rate cuts could fuel inflation to rather excessive levels and push the dollar to new lows, therefore, in case the odds are met, the Fed could leave interest rat4es at such low levels for the rest of this year, and the beginning of next one.
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Another chorus of hawkish rhetoric was heard from ECB officials today, but the effect on the common currency was limited. Trichet emphasized again that ECB’s focus is on price stability. European Commission also revised up inflation for 08 and 09 from 3.2% to 3.6% and 2.2% to2.4% respectively. However, the effect was countered by downward revision in the growth forecast, which saw 08 and 09 growth revised down from 1.8% to 1.7% and from 2.1% to 1.5% respectively. Euro continues to trade in tight range against dollar and yen. On the other hand, Sterling was once again lifted by strength in EUR/GBP and GBP/JY cross and resumes it’s rebound against dollar.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.9723; (P) 1.9806; (R1) 1.9936; More

Cable’s rise from 1.9676 resumes today and surges to as high as 1.9938 so far. At this point, intraday bias remains on the upside as long as 1.9781 holds. Outlook remains unchanged. Choppy fall from 2.0391 should have completed in form of a falling wedge at 1.9599. Rise from 1.9599, which will be confirmed as resumed on breaking of 1.9997/2.0029 resistance zone, will extend further to 2.0391 or high to continue the corrective rebound from 1.9337. Meanwhile, below 1.9781 will turn outlook mixed again.

In the bigger picture, down trend from 2.1161 have made a low at 1.9337. Recent price actions suggest that rebound from 1.9337 is still in progress and is set to have another rise to 2.0391 and above. However, strong resistance should still be seen at with 61.8% retracement of 2.1161 to 1.9337 at 2.0464 and bring completion of the corrective rebound. On the downside, break of 1.9599 will revive the case that rise from 1.9337 has completed with three waves up to 2.0391 and will encourage retest this low.

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Forex News Digest

• Monday’s Events: Cdn Provincial Accounts, U.S. Housing Vacancies, German CPI
• German States See Decline in CPIs In April
• ECB’s Trichet Says It’s "Crucial" that Policy Be Focused on Price Stability
• Stronger Euro Has Dampened Food, Energy Costs, Says EU’s Almunia (Update)
• Inflation Too High, ECB Can’t Afford to Be Complacent, Says ECB’s Liebscher
• Euro Appreciation Harming French Firms, Says France’s Lagarde
• European Market Update: European Bonds, Equities Higher
• EU Commission Revises Down Euro Zone Growth, Revises Up Inflation Forecasts
• GfK German Consumer Confidence Rises Unexpectedly in May
• Japanese Large Retailers’ Sales Surprise to the Upside in March
• Dollar Slide Drives Burgeoning U.S. Deficit as Japanese Desert Treasuries
• Bernanke May Have to Emulate Volcker to Avoid Being Tagged Another Burns
• Bank of America Says Sell Dollar as Federal Reserve Lowers Interest-Rates
• Australian, New Zealand Dollars Gain on Gold; Signs Credit Crisis May End

More Forex News

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:50	JPY	Japan Large Retailers’ Sales Mar	0.20%	-0.20%	1.30%
23:50	JPY	Japan Retail sales M/M Mar	0.50%	-1.00%	-0.90%
23:50	JPY	Japan Retail sales Y/Y Mar	1.10%	3.10%	3.20%
6:00	EUR	Germany Gfk index May	5.9	4.4	4.6
7:00	EUR	ECB’s Trichet; Liebscher; Wellink Speaking In Vienna
	EUR	Germany CPI prelim M/M Apr		0.20%	0.50%
	EUR	Germany CPI prelim Y/Y Apr		2.80%	3.10%
	EUR	Germany HICP prelim M/M Apr		0.2%%	0.50%
	EUR	Germany HICP prelim Y/Y Apr		3.10%	3.30%

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Before we give the resurgence of the dollar too much credit let’s perform a reality check. As of Friday’s close at 1.5605 the euro had fallen slightly more than four big figures, or 2.5% against the dollar in just four days. The record high for the euro of 1.6020 came this past Tuesday. But since February the euro has risen 9.0% against the US currency. For the past five weeks the euro has been trading between 1.5500 and 1.5900 with one dip below and two attempts at the top; 1.5605 is just 100 points from the middle of that range.

American statistics have not improved. But, except for the housing market, the hope is they may have stooped deteriorating. The April 19th weekly jobless claims were considerably less than forecast, 342,000 versus 377,000, but the four week average remains at borderline recession totals. New Home Sales fell to 526,000 in March, the lowest level since October 1991; sales are 36.6% lower than a year ago. Retail sales have been volatile but whatever the actual effect on consumer spending there is no discounting the effect of falling home prices on consumer attitudes. They are seriously depressed. The median new home sales price fell 6.8% in March, off 13.3% over the year. Similar drops are recorded for existing homes, the repository of the greatest portion of consumer net worth. The University of Michigan April Consumer Confidence at 62.6 shed almost seven points in one month. In contrast builder’s attitudes have been stable for several months, albeit at very low levels. But until the backlog of construction is cleared, and only price reductions can accomplish that, there can be no stability or recovery for prices. And it prices that matter for consumer confidence.

Durable good orders in March fell for the third month in a row. But perhaps more encouragingly for consumer spending the ex-transport sales number rose for their first time in three months, adding 1.5%. This figure excludes the sale of commercial aircraft (new orders for Boeing Corporation dropped from 125 in February to 99) and civilian aircraft whose orders rose 5.5%.

On the European side EMU business confidence figures, particularly the March Belgium Business Survey and the German Ifo have been considerably weaker that expected. Consumer confidence is also at low ebb in most of the major EMU countries.

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Is the pending 25 basis point cut in the Fed Funds target rate on April 30th the end or the beginning of the end to the Fed reduction cycle?

Three factors are driving that possibility. First is the time frame. Since last September the American Central Bank has cut its base rate by 3.25% (April 30th included). Rate cuts of that magnitude in a little over eight months should have a pronounced stimulative effect within six to twelve months. The historical evidence is quite strong. Secondly the Fed knows it will have to deal with inflation sooner or later. It is far easier to prevent inflationary expectations from arising than it is to squeeze them out of a market once incorporated into contracts and financial projections. And third, though the credit crisis appears to have subsided, safety for the financial system warrants caution and caution warrants a reserve of rate cuts if needed.

All of these factors are well known. One might say this is now the conservative scenario. If the US growth bottoms at -0.5% in quarters one and two (this is lower than the median current expectation) and then resumes, it could quickly surpass European GDP which is predicted to be at 1.2% for all of 2008. A US economy, naturally more flexible and responsive than its European counterpart and under the spur of 3.25% in rate cuts, could return to 1.5% - 2.0% growth is the latter part of this year. Clearly this is only a possibility but it cannot be ignored. It is not a possibility that supports a euro worth 1.6 US dollars. In addition, the ECB has striven diligently to remove any expectation of a rate cut in 2008 from market calculations. But even the smallest signs of a slowdown in the EMU and the speculation will seep back. The two main drivers of exchange rates, economic performance and interest rates, may be shifting to the dollar advantage. There is as yet scant proof: it is all conjecture. But speculation and conjecture are the heart of trading. Returning US growth follows the standard economic cause and effect model - rate cuts produce expansion. It has historical precedent and traders have demonstrated they are unwilling to push the euro above 1.6000. Betting on the dollar may be highly speculative but it has become the only game in town.

FX Solutions

IMPORTANT NOTICE: These comments are for information purposes only. Past results are not necessarily indicative of future results. Trading Futures, Options on Futures, and Foreign Exchange involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. The information contained on this email does not constitute a solicitation to buy or sell by FX Solutions,LLC., and/or its affiliates, and is not to be available to individuals in a jurisdiction where such availability would be contrary to local regulation or law.

(Chart courtesy of FX Solutions’ FX AccuCharts. Price on 1st pane, Slow Stochastics on 2nd pane; uptrend lines in green; downtrend lines in red; horizontal support/resistance lines in yellow; 200-period simple moving average in light blue.)

Speculative investors turned net long in GBP

• Overall speculative positions were increased in the week from 15 April to 22 April, as net short USD positions rose by USD 3.1bn to USD 16.9bn, driven mainly by increased positions in GBP, AUD and CAD.
• Speculative investors once again turned net long in GBP, which has regained some of its losses against EUR and USD in recent weeks. Net long GBP positions stand at USD 0.6bn.
• Net long EUR positions were reduced slightly by USD 0.2bn to USD 3.8bn.
• Also net positions in the traditional funding currencies were scaled back, as net long JPY positions were reduced by USD 1.6bn to USD 4.3bn, and net long CHF positions by USD 0.3bn to USD 0.4bn.
• Meanwhile, net long positions in the $-block currencies were built further. Net long positions in AUD and CAD both saw large increases, while net long NZD positions were close to unchanged. This mirrors the latest increase in AUD/NZD.
• On the bond market, speculative investors went net long in 2-year notes, while net short 10-year note positions were increased slightly.

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Last week our analysis yielded a net profit of 351 pips. Our long-term Canadian dollar range trade bounced back to stop us out at break even, but our Yen position rose in our favor for 151 pips. Most notably, we picked the top on Euro as the pair hit our target at 1.60 for 200 pips in profit, only to collapse immediately after. Our stop-loss on the New Zealand Dollar was hit for a loss of 77 pips, a set-back easily countered by our other trades. Looking at the week ahead, we see notable changes in EURUSD, USDCAD and NZDUSD while GBPUSD looks to have found a bias.

EUR/USD

Euro crumbles following 1.60 Test

Last week, we concluded that EURUSD was positioned well at 1.5800 for a test of the psychological level at 1.60. Our analysis proved correct, yielding 200 pips in profit. Euro bulls lost all momentum following the test at the all time high, with EURUSD dropping sharply lower to break through the upward sloping trend line we have been following since February.

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We have changed our bias to bearish. The pair is currently showing a decisive Three Black Crows pattern to further validate the bearish view. The decline has stalled ahead of 1.5560, offering poor risk-reward parameters to enter short at the current price. Rather, we will wait for a retrace to just below 1.5800 amid past price congestion to sell the pair with an eye on downside to just above 1.5340.

EUR/USD Trading Strategy

1. Short EURUSD on retrace to 1.5800
2. Set stop-loss just above all-time high near 1.6022
3. Set target above swing low at 1.5340, risking 222 pips to gain 460.

GBP/USD

Sterling Looks to Attempt a Another Rally

Last week, we did not see a clear signal on GBPUSD and opted to remain on the sidelines. We identified the pair as trading near an established pivot level at 1.9970. This had acted as support or resistance at various points in recent price action. GBPUSD has now cemented the level as significant resistance, oscillating between this and a downward sloping trend line (see chart below).

Currently, the GBPUSD has shown a Bullish Engulfing pattern. Adding further to the upside argument, we are seeing an upward-sloping support line intersecting with the previous resistance line, suggesting last week to have been a break-out from a triangle pattern. That said, current positioning does not offer attractive risk-reward parameters for an entry. We will look for a pull back to 1.9760, a multiple support/resistance level, to enter long. The most recent top at 1.9970 was largely symmetrical with the 04/04 Inverted Hammer top. We will look for the next bullish run to test resistance in a similarly symmetrical fashion with the top on 03/27.

GBP/USD Strategy

1. Long GBPUSD on a retrace near 1.9760
2. Set stop-loss below 1.9650 past recent wick lows
3. Set profit target near 2.0090, aiming for a symmetrical test of the 03/27 top, risking 110 pips to gain 330.

USD/JPY

Yen continues to retreat, but event threatens the rally

Last week, we advocated buying USDJPY on a retrace from 103.69 to 102.90, citing a confirmed Hammer candlestick. Our analysis proved correct, as the pair pulled back to the entry point and then proceeded to rally, closing at 104.41 for the week and yielding 151 pips in profit.

USDJPY is currently showing a bullish Three White Soldiers candlestick pattern, suggesting further upside. That said, we must be cognizant of the barrage of US data due this week. With USDJPY closely correlated to risk trends, the pair may see significant volatility in the coming days. We will revise our target to a more modest 105.19 and continue holding long. Conservative traders may opt to take profit here and wait for event risk to pass, or move their stop-loss to break-even at 102.90.

USD/JPY Strategy

1. Hold Long USDJPY from last week’s entry at 102.90.
2. Based on individual risk tolerance, either retain stop-loss at 101.40 or move to break-even at 102.90
3. Revise profit target to 105.19 near the 01/23 wick low.

USD/CAD

Long term trend line back in play

Last week, we opted to continue holding USDCAD short from below 1.0250 looking for a test of the range bottom. We moved our stop to break-even to contain the risk of an upside reversal. This proved wise, as USDCAD rallied to hit our stop-loss. We left the trade with no gains, but suffered no losses.

Recent price action has suggested an upward-sloping trend line from the 11/07/07 low. The pair now finds itself back at this support level having given back about half of last week’s gains. Our bias has shifted to bullish, but we will wait for confirmation with a close above support and a bullish reversal candle prior to entering a trade.

USD/CAD Strategy

1. Long USDCAD above trend line support on confirmation of a reversal.
2. Set stop-loss near 0.9983 below recent wick lows
3. Target a return to the range top at 1.0250, risking 97 pips to gain 170.

AUD/USD

Reversing Lower From 0.9500 Double Top

Last week we identified a downward-sloping resistance line connecting recent highs for a triple top. This looks to be a significant hurdle to further upside, and we opted to remain flat. AUDUSD broke past this point temporarily to hit the 0.9500 psychological resistance level, only to crash lower and stabilize above the 0.9300 level.

The pair is showing to consecutive Long Black Candles, a strong indication of a bearish bias. As we mentioned last week, we see AUDUSD retracing lower near 0.9200 again. Still, we will opt to take a short position. AUDUSD has been trading along an established bullish trend since August of last year. The yield differential is also resoundingly in favor of the Australian dollar. With those considerations in mind, we would rather wait for a long entry to present itself rather than trade counter-trend.

AUD/USD Strategy

We remain flat as we wait for an entry point to present itself.

NZD/USD

Trend Line Broken, Further Downside Looms

Last week, NZDUSD decisively broke through significant support marked by an upward-sloping trend line established in August of last year, hitting our stop loss above 0.7773 for a loss of 75 pips.

The pair is now showing two consecutive Long Black Candles, a strongly bearish signal. We will look to go short from here, targeting past price congestion near the 01/07 low of 0.7604.

NZD/USD Strategy

1. Short NZDUSD below 0.7850.
2. Set stop loss at 0.7950 above trend line support-turned resistance.
3. Set target near 0.7604, risking 100 pips to gain 246.

DailyFX

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