The EURUSD fell sharply on Thursday in one of its biggest one-day declines in months. The weak close puts the Euro in a position to post a weekly closing price reversal top on Friday. This may lead to the start of a 3 - 4 week decline.
Since last week's strong U.S. Producer Price Index release, financial traders have been attempting to price in the growing sentiment that the Fed would no longer be aggressively cutting interest rates. This has been sending a signal to traders that perhaps there would be attempts to strengthen the Dollar. The trade was very cautious at the 1.60 area.
On Thursday, better than expected initial claims and an increase in durable goods more than forecast were two signs that the U.S. economy may be riding out the economic slowdown. The subsequent selloff in the Treasury futures was also a sign that interest rates may be firmer in the future.
The battle between the Euro and the Dollar comes down to interest rates. On April 30, the Fed is expected to cut rates once more by 25 bp. The subsequent language of the report is going to tell the market how committed the Fed is to additional rate cuts later in the year. The ECB is mandated to take inflation down to 2.0% by next year. They have been supporting a policy to hold rates steady or raise them. This is where the long-term battle is going to take place. In the short-run, weak long Euro traders are going to take some profits, but until the global economic slowdown begins to show up in Euro Zone reports, look for the long-term trend to remain up.
Aggressive counter-trend traders can look at the short side while longer-term traders should be patient and wait for a pullback before adding to their positions.
Some chatter hit the GBPUSD market on Thursday concerning the future of Bank of England interest rate cuts. Talk is circulating that the BoE is turning its concerns toward inflation, which may slow down its rate of cuts for later in the year. This indecision is causing a choppy two-sided trade. Retails sales were firmer than expected, but like in the U.S., the main concern is the housing market recovery. The dominant trend is down, but stand aside until the short-term traders finish the current short-covering rally.
The USDCAD is expected to remain firm, as signs that the U.S. economy is recovering in some parts is supportive to the Dollar. There is talk among traders that the Canadian economy has not yet experienced the full force of the slowdown the U.S. economy has felt. Sentiment is building in the Canadian financial markets that the Bank of Canada is poised to cut another 50 bp over the next few months. In my opinion, the Canadian Dollar has been held up by the high price of crude oil. If this commodity should start to break, then look for the USDCAD to spike higher.
The AUDUSD backed off on Thursday following its new 24-year high. Inflation is heating up in Australia. Reports are that the Reserve Bank of Australia is poised to hike rates at its next meeting on May 6. Weak gold and wheat are short-term negatives. If gold continues its hard slide downward, then the Aussie could break in sympathy.
The Bank of New Zealand left interest rates alone. Governor Ballard decided to leave rates alone and left open the possibility of interest rate cuts later in the year. Weakness in gold is sending signals that weak commodity data may be around the corner. This is indicating that economic expansion will slow and ease inflation pressures. All this adds up to a slow economy for New Zealand and a chance of rate cuts later.
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.