Today has seen the markets gain following a positively traded Asian session, a trend which continued through the European session! The news that China is preparing a new stimulus plan to help the global recession and also US mortgage defaults, was welcomed positively by investors, who currently welcome any good news! The risk aversion seemed to take a step back today and risk appetite returned to the markets, causing the dollar and the yen to weaken against their major counterparts.
The EUR/USD did not manage to break 1.2450 and instead managed to find temporary support, causing Euro bulls to get in at new lows and driving the pair above 1.26! The next important level to watch for is 1.2630 and a clear break may lead to further gains towards 1.2680. However, tomorrow we have the ECB rate decision and traders may not want to commit to further gains in the single currency, as they await Trichet's words for further instruction!
Today the economic calendar had two important pieces of economic data. The ADP report came out negatively, showing that last month -697,000 jobs were lost, which gave traders a hint as to what Friday's actual number maybe! Analysts predict the deteriorating economic conditions will continuing and the fact the ISM Non manufacturing index contracted for yet another month, makes everyone wary of how the FED will act during the next meeting!
Traders are getting ready for tomorrow's crucial events, with the BOE and ECB rate decisions potentially set to determine both the euro and pound€™s short term outlook! The markets have already priced in cuts from both banks and therefore a surprise outcome may actually create volatility! The BOE is expected to cut by another 50bps, taking the rates down to 0.50% - its lowest ever. The latest economic data suggests the economy is deteriorating quickly and the bank therefore needs to act fast to tackle further slump in all sectors! Markets however, have priced in this fact and therefore we may see a 'sell the rumor buy the fact' situation as an aftermath! The pound has lost a lot since the beginning of last week and needs a re-tracement, which may come after the decision! However, if there is an accompanying statement which gives a signal the bank has decided to cut and maybe continue cutting, the pound may drop once again.
The ECB is also expected to cut rates by 50bps, after Trichet stated the economy is worsening and the bank has room for further cuts. Many analysts however, predict that the bank won€™t cut below 1% and may stop at 1.50%, giving the euro the upper hand as to the rate outlook. The European currency has been very weak these days and traders are waiting for further instruction from Mr. Trichet before they commit themselves for further upside. If his tone is bearish, indicating that more cuts are in store, the euro may continue to drop, perhaps even below 1.24!
So far, both euro and pound have made recovery attempts by both trading above 1.26 and 1.41 respectively, now let€™s see if the moves were strong enough to sustain these gains. However, as the risk of tomorrow's decision is on the upside, traders may wish to close their positions and square their gains before opening more. It will also be interesting to see how DOW JONES closes later today and if risk aversion prevails once again...