Currency News – Friday, 28 August 2009

Economic News

USD – USD Falls Steeply on Thin Trading and Market Optimism

After a period of steady appreciation, the USD took a sharp nose dive at the end of European market hours to close yesterday’s trading at 1.4364 versus the EUR, 1.6284 against the Pound, and 1.0877 against the CAD. The greenback fell due to several reasons that are linked to thin summer trading.

First, with Crude Oil advancing from industrial growth worldwide, the USD is experiencing some downward pressure from commodity purchases. With growth being forecast on the horizon, safety investments like the USD are losing some of their appeal. While the Gross Domestic Product (GDP) of the United States shrank less than expected, many economists are anticipating a rally in US stocks, Crude Oil prices, and riskier investments. These all point to further downward pressure on the Dollar in the days ahead. As such, yesterday’s sharp drop was inevitable.

If today’s figures on Personal Income and Personal Spending in the US confirm the rising trend of growth, the USD could see some added downward pressure. The University of Michigan’s Consumer Sentiment report will also give credibility to these assumptions if it reveals market optimism is on the rise. Traders may anticipate a bearish Dollar if economic news continues to support these latest trends.

EUR – EUR Remains Bullish at End of Month Trading

The EUR’s bullish rally against all major currency pairs continued yesterday with a surprising reversal to the EUR/USD’s recent downtrend coming at the close of European markets. Closing at a surprising 1.4364 against the greenback, the EUR made significant gains on recent boosts to market optimism, risk appetite, and thin market trading. As the month comes to an end, a significant level of position shifting takes place and some trends may see a reversal at the start of September.

Market data from the Euro-Zone and Britain has lately put a positive spin on the 16-nation currency. Germany’s Ifo Business Climate report on Wednesday showed an improvement to investor confidence in the German economy and other data yesterday continued adding momentum. While Britain’s economic figures may also show positive data, the level of confidence in the British banking system, as well as their influx of cash from their quantitative easing program, has put a downward spin on the GBP. This trend may not come to an end anytime soon, but end of month trading usually generates enough volatility to surprise even the most veteran traders.

As for today, the Euro-Zone isn’t scheduled to release any significant reports, but the British government will release its Revised GDP figures showing that Britain’s economy likely shrank by 0.8% last quarter. Switzerland will also publish its KOF Economic Barometer today, measuring the relative strength of the Swiss economy. This report has the potential to add a level of volatility to the CHF not typically experienced in the average trading week.

JPY – JPY Ends August with Batch of Poor Data

Yesterday was a day of bearishness for the Japanese Yen. Losing on all fronts, the JPY finished the day at 134.48 against the EUR, 152.35 versus the GBP, and stable at 93.64 against the Dollar. With the recent surge in market optimism, combined with thin trading at the end of the month, the Japanese Yen has faced surmounting downward pressure as safe-havens are losing their appeal.

Adding to this downward momentum was a batch of negative data releases from Tokyo at the start of Friday’s trading session. Household spending, Japanese CPI, and Japan’s Unemployment Rate all showed worse than expected numbers, with unemployment climbing to 5.7% last month. Closing out the month with such abysmal data definitely does not help the JPY’s strength.

Crude Oil – Crude Oil’s Appeal as Alternative Investment on the Rise

The appeal of Crude Oil investments rose yesterday after the US Dollar weakened on thin trading, growing risk appetite, increasing demand for energy, and end of month investment shifting. As Crude Oil prices rose for the first time in 3 days, investors flocked to the commodity as an alternative investment. Failing to breach the $70 support level, the price of a barrel of Light Sweet Crude subsequently rose back to $72.68 by the end of Thursday’s trading hours.

With global economies beginning to show signs of recovery, and countries such as Australia already on their way to substantial growth, energy prices are expected to pick up in the near future. Likewise, as strength returns to the market, the safety of the US Dollar will fall alongside it, adding further support to Crude Oil prices. A near-term target of $75 a barrel has become a popular goal for many speculators as a result.

EUR/USD	GBP/USD	USD/JPY	USD/CHF	AUD/USD	EUR/GBP
Daily Trend
Weekly Trend
Resistance	1.4480	1.6380	94.90	1.0710	0.8450	0.8880
	1.4440	1.6350	94.50	1.0670	0.8430	0.8860
	1.4400	1.6310	94.10	1.0630	0.8410	0.8840
Support	1.4320	1.6230	93.30	1.0550	0.8370	0.8800
	1.4280	1.6190	92.90	1.0510	0.8350	0.8780
	1.4260	1.6150	92.50	1.0470	0.8330	0.8760

Technical News

EUR/USD

The pair soared yesterday by 115 pips to the 1.4356 level. The 4-hour and daily chart’s oscillators seem to be showing misleading signals. However, the RSI of the hourly chart shows the pair above the 70 mark, signaling that a downward reversal is imminent. The MACD of the hourly and weekly charts also support a downward correction for the pair today. Going short with tight stops may turn out to pay off today.

GBP/USD

Despite much Bearishness in this cross this week, the GBP/USD cross went higher yesterday. On the one hand the daily chart’s Stochastic Slow supports this upward correction to continue. However, on the other hand, the RSI and MACD of the hourly chart and the Stochastic Slow of the 4-hour chart supports a bearish reversal for today. Going short with tight stops may bring big profits today.

USD/JPY

The USD/JPY pair has been range trading between the 93.19 and 94.56 levels in the past several days. The Stochastic Slow of the daily chart and RSI of the daily chart support a bullish move for today. However, the MACD of the daily charts supports a possible bearish trend for today. Entering the pair when the signals are clearer seems to be the right choice for traders today.

USD/CHF

The pair went through a dramatic bearish correction yesterday. This was despite rising over the previous several days. The RSI of the weekly chart supports a further drop in the pair for Friday’s trading. This move is also backed up by the MACD of the weekly chart and Stochastic Slow of the daily chart. Entering the popular trend now doesn’t seem to be a bad idea at all.

The Wild Card

Crude Oil

Crude Oil has resurrected yet again as the top bullish commodity in Thursday’s trading. The black gold currently stands at the $72.60 level. Today’s technical data supports another possible upward move for Crude. This is mainly supported by the hourly chart’s Stochastic Slow and 4-hour chart’s MACD. So if you forex traders want to take advantage of this popular commodity now, then enter Crude as soon as possible as end-of-week trading kicks in.

EUR/USD Trading U.S. Consumer Confidence Report

Consumer confidence in the U.S. is expected to improve in August, with economists forecasting the index to rise to 47.6 from 46.6 in July, and the rebound in household sentiment is likely to encourage an enhanced outlook for private-sector spending as policymakers anticipate economic activity to increase throughout the second-half of the year.

Trading the News: US Consumer Confidence

What’s Expected

Time of release: 08/25/2009 14:00 GMT, 10:00 EST

Primary Pair Impact : EURUSD

Expected: 47.6

Previous: 46.6

Effects of US Consumer Confidence has had on EURUSD for the past 2 months

July 2009 US Consumer Confidence

Consumer sentiment in the U.S. fell more than expected in July, with the index slipping to 46.6 from 49.3 in June amid projections for a drop to 49.0, and the data reinforces a weakening outlook for private-sector consumption as households face a weakening labor market paired with tightening credit conditions. The breakdown of the report showed the gauge of current conditions weakening to 23.4 from 25.0 in the previous month, with the index for future expectations declining to 62.0 from 65.5, and fears of a slower recovery may continue to weigh on household confidence as the outlook for growth and inflation remains weak. As a result, the Fed is widely expected to hold the benchmark interest at the record-low going into the following year, and may expand the scope of its asset purchase program in an effort to foster a sustainable recovery.

June 2009 US Consumer Confidence

U.S. consumer confidence unexpectedly weakened in June, with the index falling back to 49.3 from a revised reading of 54.8 in May, and the downturn in the labor market may continue to weigh on household sentiment as business scale back on production and employment in an effort to weather the slump in global trade. A deeper look at the report showed the index for future expectations slipped to 65.5 from 71.5 in the previous month, with the gauge of current conditions falling back to 24.8 from 29.7, and fears of a slower recovery may continue to weigh on the economic outlook going forward as the Federal Reserve forecasts unemployment to peak at 10% this year. At the same time, the drop in consumer confidence foreshadows a weakening outlook for household spending, and policymakers may take additional steps to stem the downside risks for growth and inflation in order to steer the economy out of recession.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

How To Trade This Event Risk

Consumer confidence in the U.S. is expected to improve in August, with economists forecasting the index to rise to 47.6 from 46.6 in July, and the rebound in household sentiment is likely to encourage an enhanced outlook for private-sector spending as policymakers anticipate economic activity to increase throughout the second-half of the year. The advanced GDP reading showed economic activity contracted at a slower pace in the second quarter, led by a surge in public spending, and the extraordinary efforts taken on by the government may continue to soften the landing of the world’s largest economy as the Federal Reserve holds the benchmark interest rate at the record-low and commits 1.75T in asset purchases to shore up the financial system. At the same time, a report by the Commerce Department showed retail spending unexpectedly fell 0.1% in July, while consumer credit weakened for the fifth month in June to mark the longest slump since recordkeeping began in 1991, and the data suggests households are turning increasingly pessimistic towards the economy as the Fed forecasts unemployment to peak at a high of 10% this year. Moreover, the University of Michigan consumer confidence index slipped to 63.2 in August from 66.0 in the previous month amid expectations for a rise to 69.0, while personal incomes tumbled at an annualized rate of 4.7% in June to post the biggest decline since the series began in 1960, and the weakening outlook for consumer spending may hamper the prospects for a sustainable recovery as private-sector spending accounts for more than two-thirds of the economy. Nevertheless, Fed Chairman Ben Bernanke held an improved outlook for the world’s largest economy during the summit at Jackson Hole, Wyoming, stating that the “prospects for a return to growth in the near term appear good” however, the central bank head went onto say that the recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels,” and the rise in the jobless rate may continue to weigh on household sentiment as they face a weakening labor market paired with tightening credit conditions. Nevertheless, as risk trends continue to drive price action in the currency market, a rise in risk appetite is likely to weigh in the greenback as investors move into higher yielding assets.

Trading the given event risk favors a bullish forecast for the greenback as economists anticipate consumer confidence to improve in August, and price action following the release could set the stage for a short euro-dollar trade as the outlook for future growth improves. Therefore, if the index rises to 47.6 or higher, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots ofEUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.

On the other hand, the unexpected drop in the U. of Michigan survey foreshadows a weakening outlook for consumer sentiment, and dismal consumer confidence report is likely to weigh on the exchange rate as the outlook for future growth remains highly uncertain. As a result if the index falls to 44.0 or lower in August, we will favor a bearish forecast for the greenback, and will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.

Written by David Song, Currency Analyst