Dollar Falls after FOMC Lowers Interest Rates

The main intrigue for today Forex trading session was the FOMC’s meeting at which the next interest rate should have been decided. As the most market participants expected FOMC lowered overnight interest rate in U.S. by 0.50% to 3.00%, farther widening the gap between U.S. and European interest rates. The decision was made under the pressure from the deepening crisis in the both housing and financial markets. EUR/USD jumped up by almost 100 pips after the release, showing that the dollar is going to be less attractive currency with the new 3% interest rate.

Another important statistics report came out today — it was the GDP growth for the fourth quarter of 2007. It grew far worse than the analysts expected — 0.6% compared to forecasted 1.2%. Now the signs of recession given by the real estate sector, financial market and employment situation have got confirmed by the economy output.

Interest Rate Decision's Influence on EUR/USD

Today the European Central Bank decided to leave the interest rate unchanged at 4.00%, as it was expected by the markets. But the EUR/USD went up after the decision became known - the currency pair gained more than 70 pips. What has caused that? Along with the rate decision ECB announced another $20 billion intervention to the banks to add more dollar liquidity. That greatly cut the dollar's position on Forex, especially against European currency.

Positive to the U.S. dollar was the weekly report on the initial jobless claims - last week they dropped from 337k to 322k, while a gain up to 340k has been anticipated by the market analysts.

Wholesale inventories (business) rose up by 0.6% compared with the October's 0% unchanged value. Economic strategists forecasted only 0.4%, so this is a good news for dollar bulls.

Forecast for 2008 Forex, Oil, Interest Rates

OK, the New Year is coming close and as this year is ending it's about time to try to forecast the future of the Forex market (and some other factors that influence Forex) for the year 2008. My last forecast (for 2007) didn't get its own post on this blog, but I must admit that it was a disastrous attempt - I thought that dollar will start to grow and it lost more than 10% against euro, I also predicted for the oil to remain below $65/barrel and it got beyond $90/barrel.

By posting my forecast to this blog I can be sure that I will be able to compare actual results with my thoughts exactly as they were. And maybe it will help some long-term traders too.

So here it is, 2008 forecast:

EUR/USD - ~4% down to about 1.4100.
GBP/USD - ~4.3% down to about 1.9100.
USD/JPY - ~9.6% down to about 101.50.
EUR/JPY - ~10% down to about 148.80.

Oil - it's hard for me to predict this one, but judging from the outlook on growing dollar, it should remain in the $80-$120/barrel boundaries for the whole 2008. Yeah, that's a huge range, but oil is really volatile.

Interest rates:
Fed is more likely to lower the interest rate by 1%-1.5% next year (2.75%-3.25% by the end of the year).
ECB will most probably be lowering the rates or holding them around the same level - 5-5.5% by the end of the year.
BoE will certainly cut - 3.75%-4.0% by the end of the year.
Only Bank of Japan looks bullish on the interest rates to me - 1%-1.5% by the end of 2008.

Anyway, this is just a Forex trader's forecast, so don't rely on it much. It would be also interesting to see your forecasts. Feel free to leave one in the comments.

Fed Sees No Major Problems in U.S. Economy

Today is a very important day for the financial traders from all over the world - Fed is to decide its interest rate policy until the next meeting (if not further). While almost 92% of all traders expected rate cut by 25 basis points - to 4.50% - the main intrigue was concealed in Fed's formulation and reasons for the cut (or its absence in case they would decide to leave things as they were). With one member voting against rate cut and words like "economic growth was solid in the third quarter" and that "some inflation risks remain", it is now almost certain that this was the last rate decrease until the end of 2007.

To much surprise of the majority of Forex traders, U.S. macroeconomics data came out very optimistically tuned today. Starting from GDP (advance) at 3.9% in third quarter, which appeared greater than 3.1% expected; ending with September construction spendings which increased by 0.3% (against -0.2% fall in August and and -0.4% expected for that month).

On the bad side of the reports are Chicago PMI with a decrease from 54.2 to 49.7 and a big surprise present for oil bulls - another major drawdown in U.S. commerce crude oil inventories by almost 3.9 million barrels.

EUR/USD - 1.4500 by the End of This Year?

With the Fed's rather predictable decision on interest rates cut by 0.50% September 18 (last Wednesday) dollar was doomed to cross the 1.4000 level (on EUR/USD). Its fall continued through all days left after the Fed's statement release. Hitting historically high levels with the maximum at 1.4120, USD ended last week above 1.4000, thus opening further opportunities for the EUR/USD to go to the new maximums.

This week can show (or maybe even it should show) some correction - fall back to 1.3900-1.4000 level is possible, but it is very unlikely that EUR/USD will close below 1.4000.

The main question is if the EUR/USD has enough vigor to rally to 1.4500? Or does its potential end in the low 1.4000-1.4100 levels? If we look at USD interest rates - they are still quite high. 4.75% provide a lot of place for the Fed to cut them in order save the stock and real estate market bubbles. On the other hands with the explosive end of all carry trade and consequential inevitable U.S. real estate sector collapse, Fed can decide to stay away from interest rates and with the fall of stock market USD will rise. But it is very unbelievable scenario for it to happen before the end of 2007. So, the best choice for now is to look at Fed and stay bullish on EUR/USD as long as Fed keeps on saving the financial markets, not the dollar.

Where the Future of Carry Trade Lies?

Global stocks markets calmed by central banks' generous currency interventions last week are doing quite well so far. EUR/USD and other currency pairs influenced by carry trade and subprime lending crisis chain reaction (mostly EUR/JPY and GBP/JPY) also don't jump madly through and out the support and resistance levels anymore. But what will happen next? Will the markets just soak up the liquidity, thrown in by Fed and other countries' financial authorities, and crisis will go on? Or will the carry trade trade go on, feeding credit sector with cheap JPY money and pushing EUR/USD, EUR/JPY and GBP/JPY to the new historical maximums?

Current situation doesn't hint in favor of any possible outcome - both stock markets and currency pairs are slow. In my opinion, the best way to understand the next movement is to look on the Japanese Nikkei market index. So far (today and yesterday), it has been increasing slightly, signaling the normalization of market situation. A sharp fall or rise on Nikkei can mean a faster crisis unveiling (in case of fall) or a return to carry trade dominance markets (in case of rise, not necessarily sharp, strong and long growth signals that too).

Other good method is a GBP/JPY pair, which stabilized in 220-230 range. Breaking this range at 220 level will most probably signalize a continuous bearish trend in EUR/USD, EUR/JPY, GBP/JPY and global stock markets too. Breaking the 230 level can be a sign of the return to bullish trend on those currencies and other financial markets.

Federal Reserve Loosens Rates for Banks

Federal Reserve of the United States of America lowered its primary credit rate (at which money to the banks are borrowed) from 6.25% to 5.75% to add liquidity to financial and lending markets. Federal Reserve (as the today's FOMC statement says) is concerned with the current situation of the economy growth and the crisis in the credit sector. FOMC also approved that there risks of growth slowing increased appreciably. Here is the Federal Reserve's press release concerning the bank rates:

To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.

This suggests some more cautiousness to Forex traders, especially long-term ones. While the short-term traders may reap some profits from the fast moving markets, long-term traders might need to revise their recent strategies.

Good News from U.S. Economy

With an impressively high ISM Services index today's macroeconomic data from United States was a very optimistic news for USD bulls. June ISM non-manufacturing index came out at 60.7% - 1% higher than May number, and a lot better than expected, since the negative change in ISM index was expected. Crude oil inventories for the previous week came out at a very good level too. They rose 3.1 million barrels - which will probably mean that there will be no problems for the U.S. holidays period. Initial jobless claims were a bit worse than expected (318,000 against 315,000) - but it's not a big deal really, especially if overall unemployment data which will come tomorrow will be OK.
As for the Eurozone - European Central Bank decided to leave the interest rates at 4% - no surprise here. But they also didn't mention any dangers of inflation, like they did before, so it might be a first sign for the end of ECB rate hike.
Bank of England increased the interest rates to 5.75% as expected. The main concern for them is still an inflationary pressure, but the biggest locomotive of the consumer prices in United Kingdom - real estate market is showing a slowdown.

EUR/USD Rallies at Trading Week End

Last day of a Forex trading week brought some good results for EUR/USD currency pairs, moving it past 1.3450 level (but still not breaking the recent downtrend). The main reasons of such behavior of EUR/USD can be seen in slightly better than expected April industrial orders which in year-to-year period changed by +12.2% against +8.7% anticipated by experts. Also, Jean-Claude Trichet, President of ECB, spoke about Eurozone economics marking it mostly in very optimistic epithets, that could give Euro bulls some hope for the faster interest rates increase by ECB.

Another Still Day for EUR/USD

EUR/USD Forex pair was still today again. Some insignificant volatility didn't even break 15 pips corridor. This day was low on macroeconomic releases, except for major release by the Bank of England - minutes of their latest meeting in June 6 and 7. This publication added some more weight to pound moving GBP/USD slightly higher during the day. Minutes showed that there are two more possible interest rates adjustment for 0.25% by the end of 2007.

Focus of the Day: BoE Rates and U.S. Jobless Claims

Bank of England voted to maintain its Bank Rate (interest rate) at 5.50% level - unchanged. It wasn't a surprise for Forex traders, but there was a slight possibility of interest rate hike from the BoE, so results are more bearish for the pound. From the United States the Initial Jobless Claims data for the previous week came - 309,000 against 315,00 expected - good result which moved EUR/USD back below 1.3450 level returning to the bearish trend.

EUR/USD Unsure after ECB Speaks

Today on 13:30 (UTC) ECB statement was released as the interest rates in the Eurozone were increased by 0.25% to 4.00% as expected. Jean-Claude Trichet spoke about current and expected situations in European economy and the main lines can be concluded in the following: economy is growing at a fast pace (better than expected), while inflation remains strong (because of oil prices) and the price index will be in ECB main view. This can lead to a conclusion that rates can be increased in near future. Despite of this, EUR/USD Forex pair continues its floating around 1.3500 level going nowhere for now.

EUR/USD Bearish after Fundamental News

EUR/USD broke through 1.3400 today on Forex market - showing a new 7-week low. Good macroeconomic data from U.S. was the reason for this break-through. Nonfarm payrolls - a major employment indicator of the U.S. economy - increased by 157,000 in May (22 thousands more than expected), while ISM Index - reported an increase by 0.3% up to 55.0% (against 54.0% expected). ISM Index means a lot in the U.S. economy because it describes its most powerful industries, and greatly influences FOMC rate decisions. Now it is quite possible to see an increase in U.S. interest rates by 0.25% this Fall, in my opinion.

FOMC Minutes to Support Dollar?

FOMC (Federal Open Market Committee) released its May 9 meeting Minutes on Wednesday, May 30. As it has been known since May 9 the conclusion of the meeting states that the inflation remains the main concern for the FOMC, while in future FOMC will outlook both inflation and economic growth. Statements presented in the released Minutes generally support this conclusion giving some more power for the USD bulls. This could be seen yesterday on Forex market when EUR/USD hit its new low since April 11 at 1.3406.

Euro Down to 1.3416, while Pound Regains Strength

EUR/USD touched new its new monthly low at 1.3416. That was a very important movement for Euro bears, but the currency pair bounced back up to high 1.3500 very soon and then flattened down to 1.3460 - showing its volatile nature. Nevertheless, mid-term trend for EUR/USD can be seen as bearish. At the same time GBP returned its positions today on Forex market after Bank of England spoke about increasing interest rates by .50% not the usual and expected 0.25% giving a lot of strength to the Pound bulls. GBP/USD touched 1.9892 and then corrected a bit to 1.9850 level.

CPI from US to Support Dollar?

Today the April U.S. CPI data cam out a bit higher than the market expected - 0.6% against 0.5%. A higher CPI data can mean a fast increase of the U.S. interest rate by the Fed, which in its turn gives USD a support to rally higher against other currencies. But all in all 0.1% difference can be not enough to significantly move the Forex market in any direction, so it's better to wait for more macroeconomic data.

EUR/USD Ranging before FOMC Meeting Today

After retreating back down to under 1.3550 yesterday, EUR/USD is now slightly ranging while waiting for the FOMC statement (today, 19:15 GMT) - one of the most important and anticipated fundamental events in the Forex trading community. There is almost no doubt that the interest rates will be left intact (5.25% currently). But there are many speculations about what FOMC will say about U.S. economics, inflation expectations and its regulatory policy. Strong positive expectations from FOMC can empower USD for the new bullish trend, while weak or unsure statements made by FOMC may be used by the EUR bulls for the new EUR/USD long positions.