USD - Dollar Tumbles against EUR and GBP
The U.S. Dollar fell against major currencies yesterday as gains in world stocks and a better-than-expected U.S. labor market report dampened the greenback's safe-haven appeal. After yesterday, the USD fell against the EUR, pushing the oft-traded currency pair to 1.3320. The Dollar experienced similar behavior against the Pound and closed at 1.5123.
Companies in the U.S. cut fewer jobs in April, indicating the worst of the recession's employment losses may have passed. Payrolls fell by an estimated 491,000 workers last month, less than analysts had forecast and the fewest since October. Stabilization in consumer spending following the worst slump in three decades is stoking expectations that the recession in the U.S. will end in the second half of the year.
In today's trading, forex traders should focus on a number of important fundamental data coming from both the U.S and the Euro-Zone. We expect that these pairs may become highly volatile as the market awaits the U.S. labor market figures and Interest Rate decisions from the European Central Bank (ECB) and the Bank of England (BoE).
EUR - European Interest Rates on Tap
The EUR rose against the U.S. Dollar yesterday, but gains were capped ahead of the European Central Bank's (ECB) policy meeting today when the central bank is expected to cut interest rates by a quarter percent to 1.00%. The central bank may also announce other monetary policy measures to stimulate lending and growth. The EUR gained against the USD as the pair closed at 1.3320.
Last month the ECB reduced its target rate to 1.25% in order to stabilize the economy. These days, Europe faces the most danger from debt reduction, depression, and deflation, and from their excessive debt and deleveraging. As a result, the ECB will likely cut its interest rates today while other governments embark on state-sponsored investment programs. The market will view the ECB action of a rate cut as a step to restore investor confidence, and to mitigate the economic fallout from the financial crisis.
Investors may look for the unusual price volatility to continue in the EUR/USD as the pair attempts to stabilize and find new support and resistance lines. Large price jumps such as these are not common place and present terrific opportunities to take advantage of the price swings for large profitable gains. If the rates are indeed cut, a target near 1.3000 wouldn't be unreasonable for next week.
JPY - JPY Falls against Major Currencies
Yesterday the JPY saw bearish results against most of its major currency rivals. The JPY was predominantly influenced by the other major currencies' behavior, however, as only one indicator was published from the Japanese economy. It appears lately as if the JPY is being motivated by outside factors more than by the Japanese economy.
Japan's monetary base rose 8.2% in April from a year earlier. Current account deposits at the central bank soared 81.2% after jumping 69% in March. The Bank of Japan's (BoJ) injection of large amounts of dollar-funds into money market operations amid the global credit crisis are a primary cause of this increase. It will be interesting to see how the local Japanese data will interact with equity market movement for the rest of the week in relation to the JPY's recent behavior.
Crude Oil - Oil Prices Hit 6-Month High
Crude Oil was little changed after rising above $56 a barrel for the first time since November yesterday as a surprise drop in U.S. Crude Oil inventories, and a slowdown in private sector job losses in April, boosted hopes for a turnaround in the economy. Oil prices have risen to $56 from lows around $34 in January, driven higher by stronger equity markets and hopes that the economy may begin to pull out of recession soon.
Oil prices are higher primarily because they are supported by a weaker U.S. Dollar and more positive signs from economic data releases. Last week, U.S. consumer confidence rose; U.S. construction spending and pending home sales data also surprised on the upside, further supporting sentiment towards energy. If current trends continue, a price range above $60 won't be far off for Crude Oil.
Article Source - Interest Rate Decisions in Europe to Lead Today's Market
Key Overnight Developments
• New Zealand Unemployment Surges to Highest in Over 6 Years
• Australian Dollar Gains as Jobs Surge, Unemployment Rate Falls
The Euro was little change din the overnight session, oscillating in familiar territory around the 1.33 level. The British Pound followed suit, trading sideways in a well-defined 50-pip range above 1.51.
Asia Session Highlights
New Zealand’s Unemployment Rate surged to 5.0% in the first quarter, the highest in over 6 years, as the economy shed 1.1% of its workforce in the three months through March. The latest data on business confidence suggests a majority of firms expect conditions to deteriorate over the next 12 months, meaning hiring is likely to remain tepid for the time being. Indeed, a survey of economists conducted by Bloomberg reckons the jobless rate will register above 6% in both 2009 and 2010. This will trim disposable incomes for those out of work and encourage precautionary saving for those that are still employed, weighing on spending. Private consumption is the largest component of GDP, so turmoil in the labor market is likely to keep a lid on economic growth. The economy shrank for the fourth consecutive period in the fourth quarter of 2008, shedding -0.9%, and is likely to contract again in the first three months of this year. Faced with deepening recession, the Reserve Bank of New Zealand lowered interest rates to just 2.5% at the last policy meeting and explicitly stated that they “consider it appropriate to provide further policy stimulus to the economy [and] expect to keep [interest rates] at or below the current level through until the latter part of 2010.”
Meanwhile, Australia’s Unemployment Rate unexpectedly dropped to 5.4% in April, down from 5.7% in the previous month and markedly lower than economists’ forecasts of a 5.9% result. The economy added 27.3k jobs, a stark contrast to expectations of a -25.0k decline. The details of the report were even more encouraging, with a 49.1k surge in full-time employment easily overwhelming a -21.8k drop in part-time jobs. The data implies that Australian firms are becoming more optimistic about future demand and expanding production capacity, supporting the central bank’s assertion that existing monetary and fiscal policy measures will adequately support economic recovery. The Australian Dollar jumped 70 pips higher as the data crossed the wires and tested as high as 0.7560 over the following 45 minutes.
Euro Session: What to Expect
Interest rate announcements from the European Central Bank (ECB) and the Bank of England (BOE) headline the economic calendar in European hours. The ECB has notably parted ways with major counterparts in the US, UK and Japan by opting for a “measured approach” to monetary stimulus despite deepening recession and a credible deflationary threat. This is drawing increasing accusations of inadequacy, a trend that is sure to be amplified by rising unemployment levels as the crisis wears on. ECB President Jean-Claude Trichet’s clearly defensive rhetoric is not helping matters, legitimizing calls across grumbling electorates to free national monetary capabilities from the ECB’s lackadaisical posture. Clearly, this threatens the very existence of currency union itself if politicians eager to be re-elected succumb to populist pressure. Trichet delayed the day of reckoning in April by promising a final decision on quantitative easing in May. If today’s summit sees more waffling, the Euro could succumb to substantial selling pressure as traders price in a longer path to recovery as well as the political implications of inaction.
Turning to the UK, the recent signs of stabilization in lending as well as a handful of upside surprises in consumer confidence and retail sales are likely to give the BOE enough reason to hold off on making substantive changes to interest rates (already at 0.5%) or existing quantitative easing measures. Still, unemployment is at the highest in over a decade and the outlook for economic growth remains decidedly ominous: NIESR, a think tank, has said the economy could “continue to decline for up to another year” while the International Monetary Fund revised down their UK economic growth projections by -1.3%, calling for the economy to shed -4.1% through 2009. If this is enough to produce an expansion of the central bank’s asset purchasing programs, the British Pound could slip.
In Switzerland, the Consumer Price Index is expected to fall for the second consecutive month in April, signaling that the inflation is shrinking at an annual pace of -0.6%, the most in over three decades. Deflation threatens to complicate the current economic downturn if expectations of lower prices become entrenched, encouraging consumers and businesses to perpetually hold off on spending and investment as they wait for the best possible bargain. Needless to say this is quite dangerous, opening the door for the mountain nation to sink into long-term stagnation.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro, British Pound in Focus Ahead of Interest Rate Announcements (Euro Open)
Where the Conflict Arises
An ongoing recession and lingering problems with financial conditions (along with the political pressures that come along with it) make an additional rate cut the natural choice. However, with tentative signs of a recovery in the making (at this point it is a slowdown in the economic contraction rather than a return to growth) and the financial markets enjoying months of stability; the needs for monetary policy beyond May have taken very divergent paths. In the past, the European policy authority has been hailed for its transparency and projecting the group’s intentions for the future. Through recent months though, central bank members have generated more confusion than they have clarity. Some (including Germany’s Weber) have supported a hold for easing at one percent while playing down the possibility of quantitative easing and other un-orthodox policy approaches. On the other hand, there have been those that have taken the line that the door should be left open for additional cuts and atypical efforts that have already been adopted by the Federal Reserve and Bank of England. Should the ECB take the same tack as so many of its major counterparts, it would be considered by the currency market an admission that conditions are perhaps worse than speculators are expecting and the recovery in the Euro Zone could be stunted due to all the policy that has been put in place.
What are the Scenarios?
There is a lot at stake for this central bank decision; and there are many small factors that can alter the market’s ultimate perception of the results. However, there will be a few specific themes that will be considered critical to the event. First and foremost, the market will look to the unambiguous rate decision at 11:45 GMT. The statement that accompanies the announcement on the refinancing rate is real driver. Any official announcements for changes in the deposit facility, plans to purchase private debt or potentially even the adoption of a quantitative easing-like effort will be presented to the market here. Then there is the ECB President and Vice President’s press conference with reporters at 12:30 GMT. President Jean-Claude Trichet will give more color on what to expect from the future for growth and policy as the public grills him.
This is a relatively simplistic breakdown. There are many nuances to this event and the market’s reaction under the various outcomes is highly uncertainty. At the same time, it helps to gauge what the broader market is preparing for in order to better prepare for an in-line or surprise response. So, to offer some benchmarks, let’s look over some of the potential scenarios and their probabilities.
1. The ECB Cuts by 25 basis points and does writes off neither further cuts nor un-conventional policy (65%)
This is by far the most likely outcome for this meeting. It has been the central bank’s stance since its inception to take slow and measured steps toward its policy. This helps to avoid market volatility and is somewhat necessary in applying policy that impacts many individual economies. At the same time, there are some points of nuance that can arise in the details. Extending loan maturities (something that was expected but not fulfilled last month) and the language surrounding future paths can spark volatility on their own. Status quo (no change to loan maturities or clear signal for a floor underneath rate cuts) could be a driver on its own.
2. The ECB Cuts by 25 basis points and indicates that it is shifting to a wait-and-see stance (20%)
Just a few months ago, the ECB defied expectations after signaling the group would hold off on any further rate cuts or policy shifts at the following meeting to see how previous efforts have impacted the economy and markets (when many other central banks were scrambling for options in addition to whatever easing they could afford). With a benchmark at one percent, there is little additional aid further cuts could afford. What’s more, recent signs of stability could negate the need to expand the money supply (or at least offer more time to assess the situation). Under this scenario, we will look for language that clearly states that there is no cut due in June nor are any additional measures outside of the norm necessary.
3. The ECB Cuts by 25 basis points and makes a definitive shift towards un-orthodox measures (15%)
There is little doubt that the central bank will lower its benchmark by 25 basis points; but does the European economy need additional help to prevent deeper recession? This is the outcome should the answer to this question be ‘yes.’ A rate cut will be followed by language that leaves the door open to further cuts (more inflammatory would be rhetoric that suggests it is necessary). Going one step further would be to admit that further effort must be made outside the normal channels. Least surprising would be an extension of loans. Then, there is the chance that they will take up the purchases of private debt. Most unlikely is announcing outright quantitative easing.
4. Other (5%)
This is the catchall category of those possibilities that are considered very unlikely. A cut that is greater than 25 basis points, no cut at all, or the adoption of many unorthodox tool as once have low probabilities. Of course, if they happen, the response from the currency market would be tremendous.
What Currency Pairs To Watch
This pair is on the cusp of a major breakout. Earlier this week, a rising trend that fought the receding highs was taken out to remove any semblance of a bullish bias. Now, we are left with a wedge formation that yearns for a breakout regardless of the direction. From a fundamental stand point, the euro is still significantly more valuable than the economical battered pound. Should the ECB take a more active role in policy, it could bring the Euro Zone down to the level of the UK.
The world’s most liquid currency pair, EURUSD also happens to be a key gauge for risk appetite. This means that the Euro Zone’s pace of monetary policy could be disrupted by the Fed Stress Test results that are due later in the US session on the same day. However, the technicals are appealing. On Monday, a long-term falling trend was cleared; and now spot is treating that break level as support. The bullish sentiment will have to be significant for EURUSD to run the 200-day SMA rather than reverse.
EURCHF presents another clear wedge that demands a breakout. There are outside factors working against this pair. The Swiss National Bank has stated its plans of FX intervention to prevent further appreciation of the franc multiple times. On the other hand, the two economies are closely tied and policy made by the ECB is often mirrored by the SNB. This could be a complicated reaction.
Written by John Kicklighter, Currency Strategist
Article Source - How Will The Euro Respond To The ECB Rate Decision?
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