A better than expected U.S. CPI number helped put pressure on the U.S. Dollar on Wednesday. The CPI number magically showed only a modest increase despite surging food and gasoline prices during April
As the Fed nears the end of its rate cutting cycle, it seems to have shifted its focus to inflation and the Dollar. Comments by a couple of Fed governors over the past week mentioned the Fed's concern about inflation. This could be a sign that the Fed sees the economy stabilizing and that a full-blown recession may have been avoided.
Wednesday's CPI number and Tuesday's Retail number were both signs that the Fed seems to have made the right moves the past nine months by providing just enough liquidity to provide an economic stimulus without fueling inflation.
Despite the lower than expected increase in the seasonally adjusted CPI number, the Fed is still going to have to keep an eye on the food and energy markets. If prices continue to rally in these two areas, then consumers may cutback their spending in other areas. This could cripple the economy.
The ECB has not changed its hawkish attitude about keeping interest rates at 4%. A spattering of economic reports have showed signs of weakness, but with a down trend established in these economic reports, the ECB will continue to stand strong against inflation.
With both the Fed and ECB concerned about inflation, the EURUSD is most likely going to trade in a range until either the ECB, or the Fed, changes its stance on interest rates.
Look for the Euro to continue to tighten the trading range between 1.5283 and 1.5595. The tighter they wind this range, the bigger the move when the range is finally broken. The first upside target on a breakout rally is 1.5651. On the downside, look for a possible test of 1.5228.
Bank of England Has to Decide Where to Fight the Battle
Housing and property values continue to erode while consumer prices continue to move higher. The Bank of England is in a difficult position due to these conflicting fundamentals.
The issue at this time is whether the Bank of England should continue to cut interest rates. Reducing rates would provide a stimulus to the economy, but would weaken the currency. Raising rates to fight inflation could squash growth possibilities.
Based on the trading action Wednesday, it looks as if traders are betting on another interest rate cut. This market is poised to challenge the cluster of bottoms at 1.9360, 1.9336 and 1.9181. Watch for a possible technical bounce at these levels, but continue to press the short side on all rallies until the trend changes to up.
Appetite for Risk Puts Pressure on Yen and Swiss Franc
The USDJPY rallied with the U.S. stock market as traders increased their appetite for risk.
The pair is now in a position to take out the last main top at 105.71 to reaffirm the up trend. Technically speaking, regaining an up trending Gann line could accelerate the market to the February high at 108.61.
The USDCHF is in a similar position. The trading action on Wednesday has put the market in a position to reaffirm the uptrend on a breakout over 1.0625. A close over 106.30 will indicate further strength with a possible upside target of 1.0865.
Strengthening Economy and Firm Energy Prices Support Canadian Dollar
The USDCAD continues to trade in a range with a slight bias to the downside due to the surging crude oil market and the strengthening Canadian economy.
The recent stronger than expected economic reports are sending a sign that the Bank of Canada may not have to announce a rate cut at its next meeting on June 10.
Continue to look for sideways trading with par acting as a pivot price. If crude breaks sharply, then look to press the short side.
Slowing Economy Shows Interest Rate Hikes Are Working
The AUDUSD fell as a report showing wage growth unexpectedly slowed.
Technical traders may start to short this market especially if a major trend line is broken at 93.30. The charts indicate a possible break to .9248.
Signs that the economy is slowing in New Zealand is helping to push the NZDUSD lower.
Look for technical traders to try to push this pair through an up trending Gann angle .7609. A close under this level could trigger a sharp break to .7427.
Please do not hesitate to contact us at 800-971-2440, with any questions.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as spread or straddle trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.