Forex Focus December 22nd to 26th
2008 goes out with a bang!
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The last full week of 2008 gave us a wild and rocky ride which saw the Fed cut close to zero and the euro strengthen across the board for the second week running...
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The euro (chart 1) hit the ground running when the markets opened for the week. Downside dollar pressure continued, fuelled by uncertainty over the US automaker bailout and the anticipated Fed interest rate cut the following day. Tuesday’s run-up to the Fed’s announcement saw the release of gloomy US data. Consumer prices plunged at record rates for the second month running, spurring fears of deflation; and US housing numbers fell much lower than expected and surveyed their largest year to year drops in more than 17 years. Later on Tuesday, the Fed announced that it was cutting its key interest rate to between zero and 0.25% and anticipated that these low rates would continue for ‘some time’, sending the euro 300 pips north in a couple of hours.
The Fed also promised to use ‘all available tools’ to support the stumbling economy in its follow-up statement. As President-Elect Barack Obama noted only a couple of hours before the announcement, rates are just about as low as they can go. Wednesday saw the euro find strong resistance at the 50% retracement level of the EUR/USD down move from 1.60. However, this was overcome on the third attempt and the euro powered on to hit highs of 1.47 by Thursday morning. The dollar got a reprieve when the ECB stepped in and announced plans to reduce its overnight deposit rate by 50 bps in a bid to jump-start lending between banks. EUR/USD immediately gapped down about 100 pips and the course for the rest of the week was south. The same 50% retracement level came into play, this time offering support. Friday morning’s European session opened to the news that German producer prices had dropped the most since records began in 1949, giving the ECB room for further rate cuts in January and the euro dropped to 1.39 by the middle of the US session. The pair closed the week a little above 1.39 at 1.3921.
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Chart 1 EUR (hourly)
Sterling (chart 2) rallied on the Fed’s rate cut statement but the rally was short-lived. Wednesday’s weak UK job numbers and the BoE’s Monetary Policy Committee meeting minutes left little doubt that there were more interest rate cuts to come from the BoE in the New Year. The pound fell against all the majors this week and with little light visible at the end of the tunnel, I expect more downside pressure.
The dollar fell to new 13-year lows against the yen after the Fed’s rate cut The Bank of Japan came under mounting pressure to cut their interest rates and the dollar strengthened in anticipation. Friday saw the bank deliver the goods with a bigger than expected cut to 0.10% along with other measures to combat the corporate credit crunch. On Saturday, Japan unveiled its 2009 budget plans to increase spending to a record $988B in a bid to spend its way out of recession. Although the Japanese finance minister has high hopes for the draft budget, it was received with skepticism.
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Chart 2 GBP/USD (hourly)
Outlook and Calendar
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It is the holiday season in the major financial centres around the world. The resulting thin market could either be very flat or very volatile, so take care.
Economic data will also be pretty light.
In the States, Tuesday lists the final GDP numbers; consumer sentiment and important housing data. While on Christmas Eve there’s Durable Goods Orders and Unemployment Claims.
In Euro-land, we’ll be looking at German Consumer Confidence and Industrial New Orders on Monday and Tuesday sees the Current Account numbers.
The UK releases Final GDP and its Current Account on Tuesday.
There’s the usual huge raft of end-of-the-month data from Japan including the Monthly Report on Monday and Industrial Production and Retail sales on Thursday.
Forecast
It’s a tough call this week but we see EUR/USD meeting resistance at 1.4180 and support at 1.3630 and then 1.3250.
We see GBP/USD resistance at 1.5250 and support at 1.4580.
USD/JPY will find resistance at 92.50 and support at 87.10.Visit my blog Colt on Candles for a weekly test of candlestick patterns.
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