Comments from the European Central Bank reiterating that accelerating inflation is the main reason that it is likely to leave interest rates at current levels helped support the Euro on Monday. Since June 2007, the ECB has kept interest rates at 4% citing the need to fight inflation and drive it down to an acceptable level of 2.5%. The Fed on the other hand is expected to cut interest rates by at least 25 bp on April 30. The interest rate differential and the trend favor the long Euro.
The strong close puts the EURUSD in a position to challenge the 1.60 price. Trading should be tentative at this level as many traders are cautiously approaching the long side due to the possibility of a G-7 intervention. Most of the rhetoric from the ECB and the G-7 has been geared toward excessive volatility. Therefore, it is imperative that traders attack the 1.60 area in a smooth orderly fashion. Any excessive breakouts to the upside are most likely to be met with aggressive profit taking.
BoE Plan: A Case of Too Little Too Late.
Although the initial reaction to the rumor of a BoE bailout of underperforming mortgages triggered a short-covering rally late last week, an overwhelming number of traders definitely felt the plan was weak and would not help ease the gridlock in the U.K. credit markets. The GBPUSD sold off hard as traders are now saying that the conditions are ripe for another 25 – 50 bp cut in rates to help stimulate the U.K. economy.
While the plan is likely to have little or no effect over the near-term, the market is instead focusing on the fact that the plan may buy the Bank of England some time to work the rates lower to stimulate growth.
Stronger Dollar Likely to Keep Pressure on Swiss and Yen
The up trends in the USDCHF and USDJPY reflect the strength in the U.S. stock markets. With plenty of room indicated to the upside on the equities charts, look for pressure to build for a continuation of this rally. Stay long or look to buy dips.
Bank of Canada Expected to Cut Rates by 50 bp
The weak U.S. economy spilling over into the Canadian economy is the biggest reason the Bank of Canada is expected to cut rates by as much as 50 bp on Tuesday. Any prolonged slowdown in the U.S. economy would cause a similar, if not worse, condition in Canada where they rely on the U.S. to generate exports. Cutting rates in Canada is bullish for the U.S. Dollar, so expect a rally if the cut is at least 50 bp. If the BoC cuts anything less than 50 bp then expect to be a seller of USDCAD.
Be prepared to trade the short-end of USDCAD if there is no reaction to the announcement and the energy complex is trading firmer as traders are likely to rally the Canadian Dollar on the strength of the energy complex.
Reports of the economy heating up once again attracted buyers to the AUDUSD on Monday. The Royal Bank of Australia is reportedly backing down from its comments in March that we may have seen the last of the interest rate hikes. Talk is now spreading that there is likely to be a 25 bp hike by the end of the year. The high interest rates in Australia are attracting those longs with an appetite for risk. Look for the Aussie to challenge the double top and all-time high before running out of steam and settling back.
Traders are looking for the Bank of New Zealand to leave interest rates alone at its next meeting on April 24. Traders looking for higher-yields bought NZDUSD. The weak economic factors are still a negative for this pair. Look to sell a rally.
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