The Federal Reserve cut key interest rates by three quarters to 2.25 pct on Tuesday, its lowest level since 2004. The U.S. now has the second lowest interest rate among the major economic powers. The amount of the rate cut proved to be a battle between traders and economists. Financial fund traders had pegged a full 1.00 percent cut while economists looked for 75 bp. This recent cut leaves room for the Fed to cut further if conditions should suggest doing so.
In the language following the release of the cut, the Fed said Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help promote moderate growth over time and to mitigate the risks to economic activity. Reading between the lines, the Fed listed market liquidity first and recession fears second. Some interpret it as the Fed conceding that we are in a recession. The threat of inflation was not clearly addressed, but not cutting a full 1 percent as the market was calling for, may be an indication that inflation is still a concern. The Fed could also be sending a signal as far as the credit crisis is concerned by mentioning market liquidity before recession. Many traders feel that the Carlyle and Bear Stearns problems are just the tip of the iceberg. The Fed has to do its best to instill confidence in the U.S. economy and is prepared to act swiftly and decisively should another problem arise.
EURUSD: The EUR broke sharply in reaction to the Fed interest rate cut. The market had been pricing the Euro for a full point cut and was very disappointed by the move. Short Dollar traders were squeezed and forced to cover driving the EUR lower. Technically, there is difference between making a short-term top and changing the trend to down. Tuesdayâ€™s action looks like a short-term top at this time. For several weeks, the market has been walking up a steep uptrend angle at 1.559 today. A violation of this angle will be the first sign of a change in trend. In addition, based on the short-term swing of 1.528 to 1.590, a normal correction will take the EUR to 1.558 to 1.550. Watch for new buyers to surface following this retrace. Thursday's close, which ends the week in the U.S., is going to be an important close as the market is now set up for a weekly reversal down.
GBPUSD: The main fundamental affecting the GBP at this time is the bank credit issue. The market seems to be waiting for bad news about UK banks. Traders are anticipating the U.S. economic woes to spread overseas. This is the main cause of the profit-taking action this week. The main trend is down. Look for an opportunity to sell a rally back to 2.027 â€“ 2.036. Key support for a counter-trend buy is 1.9879 to 1.9760. Be careful not to be chopped in this market as it makes its transition from bullish to bearish.
USDJPY: The USDJPY surged to its highest one-day range in 9 years. The surprise cut of only 75 bp caught traders in a short squeeze. In addition, strong earnings in Lehman and Goldman drove the stock market higher. Despite the bullish action, this is only a short-covering rally. The market will have to make a secondary higher bottom to give a sign that the trend is getting ready to turn higher. Look for a selling opportunity at a Gann angle at 102.61. If this fails to stop the rally, then the market is likely to complete a 50% correction to 103.85 to 104.97. Look for a counter-trend buying opportunity at 99.52.
USDCHF: The USDCHF rallied sharply higher as traders chased the strong U.S. stock market. Some of the rally was also attributed to massive short covering. Look for selling pressure to come in following the first test of resistance at 1.0161 to 1.0206. Give the market time to develop a support base before entering the long side.
USDCAD: The USDCAD remained flat, but is slowly building a bullish higher bottom formation. The three main higher bottoms are at .9796, .9736 and .9710. Resistance is at 1.00. A close above par can be perceived as bullish. The CAD will be supported by strong wheat, crude and gold prices. If these three markets turn weak, then the USDCAD should move sharply higher. Without weakness in the exports, the market will continue to be range bound.
AUDUSD: It looks as if a long-term double top is forming in the AUDUSD. Look to sell a rally back into a resistance zone at .9300 to .9341. The major support comes in at .9203. If this price fails to hold the next test, then the market is set up for a sharp break all the way back to .9005. The RBA has been quiet lately after stating that they expect inflation to be under control and that interest cuts may be on hold for a few months. This action has been putting pressure on the Aussie.
NZDUSD: There was no confirmation of the double top on Tuesday, but the weak close puts the market in a position to challenge the last main bottom at .7872. A break below this price will turn the main trend down and confirm the double top. Breaking .7992 will also signal a topping signal. Sell a rally back to .8067 to .8102 in anticipation of the start of a decline.
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