This week is coming to an end, with EUR/USD trapped in a tight range of 1.4550-1.47. After a relatively busy trading week, with dollar gaining all across the board, traders were waiting todayâ€™s payroll data for more insight as to what the FED will do next week.
Most analysts believe that FED will cut the rates by 25 pbs, due to comments by Bernanke and pals that the bank is ready to act to defuse the recent credit crisis. Non farm payrolls didnâ€™t really give that much information, as the number was close to forecasts at +94000 new jobs instead of 80000 which was forecasted. EUR/USD although dropped in the first few minutes, managed to reverse the move and made another go to the upside to try and meet 1.47, however the move was capped quickly as willing sellers came to dollars rescue!
The question is what will Bernanke and pals do at the policy meeting next week? Will they take the safe approach and cut rates once again in order to stabilize the housing problems? Or will they leave rates unchanged due to the very low dollar levels and fear of further deterioration in the markets?
With many analysts predicting a rate cut of 25 points, and markets already pricing in this outcome, the only other way that we will see a big move in all dollar related pairs, will be a surprise move by Bernanke and friends. The two other scenarios would be either to leave rates unchanged and therefore give dollar a temporary boost, or cut as much as 50 points like the last time, and so dollar will continue its recent slide.
Although this week we saw some strength in the greenback, the fact that euro bulls are always ready to buy in dips, puts further pressure in the American currency and thus makes it difficult for dollar to sustain its gains. The good example was yesterday, just before Trichet press conference, EUR/USD made new lows at 1.4520 but it was met with euro bids and the fact that Trichet was slightly hawkish gave the green light for euro to climb back up.
The question at the moment in everyoneâ€™s mind is what happens now for the greenback? With the year coming to an end and 1.50 looking more distant by the day, the next important event will be FOMC meeting which will hopefully provide volatility and break the pair from the recent range. Historically, the pair is appreciating towards the end of the year and then falls from New Year onwards. So, we wouldnâ€™t be surprised to see further EUR/USD gains towards the recent highs, before the good dollar correction finally starts to materialize.
So, letâ€™s wait and see what next week will bring us and how markets will react to FOMC outcome and also CPI and PPI data, which will be monitored closely by everyoneâ€¦