Letâ€™s get ready for a busy week as not only do we have many economic releases out of the US but we also have the FOMC meeting tomorrow with the Feds decision the most awaited event of the month. Many speculators have already started to price in a 25 points cut, but the general feeling is that Bernanke and pals wont give in to the marketâ€™s pressure for further easing of the interest rates.
Letâ€™s see briefly what happened last week, with a not so busy economic calendar. The main event of the week was the non farm payrolls release, which was close to markets forecasts and therefore it was not enough to spark a new wave of dollar sales.
EUR/USD printed a new monthly low at 1.4520 but the move didnâ€™t find any more interest and soon it retraced back above 1.46 where it closed Friday evening.
The other important events of the week were the BOE and ECB rate decisions. Although initially the forecasts wanted BOE to leave rates unchanged, the very fact that Halifax House prices printed a very low number, combined with further negative data from the UK economy, made the bank rethink their policy and therefore having to cut rates instead. The immediate reaction by the markets was panic followed by a complete pound sell off all across the board with GBP/USD falling near the 2.0100 level.
However, as all investors priced in a potential rate cut, when the news hit the wires, pound made a comeback and was moving up towards 2.0300 where it closed Friday night.
Although Trichet left rates unchanged, markets were a bit surprised by his hawkish tone, as he basically said that the bank will continue monitoring the inflation which they fear is getting higher and higher!
This week we have a very busy economic calendar out of the US and Europe. It will be very interesting to see how the market will react tomorrow after the Fed decision, after all the hype thatâ€™s been built over the last few weeks. Many analysts believe that Fed will cut tomorrow by 25 points but will keep its hawkish tone regarding inflationary risks, due to the fact that dollar is already suffering and oil is near record levels once again. Whatever the outcome, we are likely to see a lot of volatility before and after the announcement with traders trying to position themselves.
Other news this week is: CPI and PPI out of the US, which will be monitored closely by the markets for future decisions on rates by the FED. Also we have Housing data today, with pending home sales, for more insight as to what is happening in the already suffering housing sector. Letâ€™s not forget retails sales and trade balance later on in the week.
In addition we have CPI and PPI out of the UK which will be watched closely by the market as everyone starts to believe that further cuts are due next year.
EUR/USD is at very important levels at the moment as it is very close to either 1.48 or to a deeper correction back to 1.44. In the last two weeks all we have seen was dollar trying hard to correct its recent losses, with the pair breaking important support levels but retracing at a quicker pace.
This is not likely to continue this week, as the risk of tomorrowâ€™s announcement coupled with the release of further negative economic data might drive EUR/USD higher. However, as long as the pair trading below 1.48 there are still hopes for a deeper correction, depending on this weeks economic releases. Lets face it, markets have already priced in a cut of 25pbs by the FED, therefore as long as Bernnake doesnâ€™t surprise us i.e. 50 pbs cut or no cut, dollar will be more likely to consolidate further. Although a cut is always conceived negative for the greenback, this time we might see strength instead as traders might think that FED is taking steps against recession. Therefore, providing that other economic data help, EUR/USD might drop further towards 1.45. Donâ€™t forget that already banks and investment houses are advising their clients to start buying the greenback for a possible reversal.
For sure it will be a very active week, watch out for any breakouts and new highs in the currencies and be aware of more financial crisis arising out of both US and Europeâ€¦