Another week has started, with the economic calendar full of important releases. This week will definitely give us some idea regarding the dollar direction and most importantly if EUR/USD is heading again towards recent highs…

Let’s start with what happened last week, as we had a new profound dollar rally that lasted most of the days till Fridays close. The news from US was all positive for the dollar, with durable goods orders, GDP and new home sales printing better than expected numbers. This caused dollar to appreciate against most of the currencies and especially the euro. EUR/USD broke important support levels of 1.55 and printed new daily low at 1.5450.

One other reason for dollars rally was due to the oil drop from $133 per barrel to 125. The move was seen as a liquidation of long positions due to comments from many officials that oil prices are getting out of hand and something must be done to stop this. Although crude oil inventories were much lower than expected, oil still dropped dramatically after comments from OPEC officials stated that there might be an increase in oil after a few months.

The question now is whets next for the dollar? Will this week be dollar positive or will it put dollar bulls back on the defensive?

Well, the economic news out of US are many, with ISM Manufacturing and non manufacturing due out today and in the next few days. These numbers are vital for the state of the US economy and analysts predict that both will come out lower once again. However if there is a surprise to the upside and we have better than expected data, that will support the greenback and we might see further positive moves.

Traders will be very wary this week though, as Thursday and Friday are very crucial for all markets. On Thursday we have the ECB rate decision, which is expected to leave the rates unchanged. Later that day, TrIchet is speaking in front of the journalists and we expect a lot of volatility during his speech. The sentiment generally amongst traders is that Mr. Trichet and co will be hawkish once again, even though some economic data disappointed lately. Comments last week of the IFO president gave fuel to all the rate hike speculations, as he said that there is need for rates to be raised and no prospect for rate cuts in the horizon.

In the same day we have the Bank of England decision, which is expected to leave rates unchanged. There are some analysts who are forecasting that BOE might hike rates too in the coming months, as inflation is getting out of hand. After the latest speech by Mervin King, the banks president, it was clear that a letter to the government might be written in order to explain the high inflation numbers. However, the fact that the economic data is coming out negative over the last few weeks, together with recent problems in Bradford and Bingley-one of the largest mortgage lenders in the country, weighs in the pound and there is not a clear view as to what the bank will do. One thing is for sure: if the economic data continue to disappoint and further slowdown in the housing market evolves, then BOE might have to bite the bullet and cut.

The big event of this week is Nonfarm payrolls on Friday. The fact that this economic release comes out in the same week as ECB and BOE rate decision will make trading very dangerous, and traders might exit their positions ahead of the data, as the risk will be bigger than normal. The forecasts for the NFP number want a negative outcome of -50000. The very fact that this will be the fifth consecutive negative month sparks new recession fears, as the last recession of the country saw 10 consecutive negative months. This will definitely have a negative impact in the dollar and is we have a worst than expected number of -100000 we might see EUR/USD rally back towards recent record highs!

EUR/USD has started this week on a positive note and if it manages to break important resistance of 1.5630 then 1.5680 -1.57 seems the next possible target. To the downside, only a clear break of 1.5470 opens way towards 1.5380-1.54. The most possible scenario might be that the pair will trade between 1.5450-1.5650 ranges before any important events come later in the week.

GBP/USD is looking very weak and a break of 1.96 might open way towards 1.9530 where a good support can be found. We think that if the economic data continues to disappoint, the pound might drop further, but traders will be wary of Thursday’s rate decision before they decide to breakout of recent 1.96-1.98 ranges.

Let’s see how the currencies will behave this week and what the trader’s reactions to the big important news will be. The market sentiment at the moment is back to risk aversion, and carry trades continue to fall, due to the subprime mortgage which still dominates the trader’s moves. It will be interesting to hear what the Japanese officials say after the BOJ rate decision also due out this week. If there are comments that the bank might need to raise rates, the yen will appreciate further…