Speculators Increase Bets That ECB Will Slash Rates

on January 06 2009 9:22 PM

The U.S. Dollar continued its rise versus the Euro on Tuesday. A report released before the New York opening showed a slow inflation rate and opened the door for further rate cuts by the ECB. Traders are now increasing bets the ECB will cut rates to 2.5% at its next meeting on January 15. Continue to look for more downside pressure.

Bottom pickers are supporting the British Pound at this time. This move is all speculation as the recently released reports gave no indication that GBP USD was ready to turn higher. Part of the reason for the developing strength in the Pound could be the anticipation of the Bank of England's purchase of asset-backed securities. Retail sales are still bad and consumer confidence is dropping. Banks have just about shut everyone out of the mortgage market. Until the BoE can convince the banks to lend money, look for it to continue to try to revive the economy through creative stimulus plans and interest rate cuts.

Investors are moving money out of the Swiss Franc and seeking higher yielding assets elsewhere. Lower gold prices and a weak Euro Zone are also contributing to the break in the USD CHF. This pair should feel upward momentum especially if gold loses its luster as a safe haven investment.

Speculation that the U.S. economic stimulus plan will turn the economy around is helping to put downside pressure on the Japanese Yen. The charts indicate a breakout to the upside is possible. Based on the size and duration of the break in 2008, there is plenty of room to move to the upside for the USD JPY. Renewed confidence in higher risk assets is helping to keep the Yen lower. There may be one more retracement before the next rally; however, it looks as if the bottom is in.

Stronger commodity prices helped the Canadian Dollar rally to a new two-week high on Tuesday. The strong surge in commodities was led by strength in crude oil, natural gas, and copper. Production cuts by OPEC and tensions in the Middle East should keep upside pressure on crude oil. This news should help support the Canadian economy over the near term.

Australian Dollars and New Zealand Dollars are benefitting from higher commodity markets such as gold and wheat. As long as traders are looking for more risk in the marketplace then continue to look for the Aussie and the Kiwi to press the upside. Once the demand for risk subsides, then look for a retrace of the current rally. Do not expect a runaway market at this time. These markets are still establishing their support bases.

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