Forex Blog

EUR/USD had a very big drop today as the stock markets grew in U.S. and the Forex traders expected positive decision from the FOMC monetary policy. ISM report also supported the greenback today with an increase in its index, but the main news was the interest rate decision and (more important) the statement released by the Federal Reserve. After the release of the report, dollar began to go down slightly, but overall it had a very good day against the euro today. EUR/USD went down from 1.5570 to 1.5446 today — the lowest since June 16.

FOMC left the federal funds rate unchanged at 2.00% today. The statement said that the economic situation improves but the employment, housing and financial sectors are still at risk. Nevertheless, inflation uncertainty remains a significant concern for the Federal Reserve. This will probably mean that there will be no further rate cuts or increases during the next meeting or two.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

ISM non-manufacturing index rose from 48.2% to 49.5% in July — this growth exceeds the median experts’ estimate by 0.8%.

Dollar (and, actually, Japanese yen too) showed a major triumph on Forex market today after the Bank of England decided to go down from 5.50% to 5.25% on the main interest rate. And despite, while BoE lowered the rate, ECB held the rate at the same 4.00% value, dollar bulls pushed EUR/USD down as well as the GBP/USD currency pair. And that’s on the disappointing fundamental data coming out in U.S.

U.S. initial jobless claims improved from the previous report at a little worse pace than market strategists expected — it fell from 378,000 (revised up from 375,000) to 356,000. That’s still a very high number for this indicator and it’s a clear sign of the current elevated recession risks.

Consumer credit in the United States in December grew by $2.4 billion — a very low number compared to the November’s $15.4 billion increase. Even pessimistic expectations of $8.0 million growth were above the released value.

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.

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.

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.

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.

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.

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 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.

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.