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FX daily Commentary

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ECB and BOE Will Determine Dollar Fate After The Recent Rally...

Wed, Feb 6 2008, 14:10 GMT
by Lena Manousarides

FXGreece

What a day we had yesterday, with EUR/USD taking a “dive” against all odds, and breaking important support levels in a matter of few minutes. The pair started at 1.4830 and printed a daily low just above 1.46. The move was aggressive and was attributed mainly in the falling DOW JONES and bad European economic data.

Euro zone has started printing its first negative numbers in a long time, with both PMI and retails sales coming out unexpectedly low. Investors were caught off guard as the bad economic data was only coming out of the US till now.

However after US printed a very low ISM below the psychological 50, the recession bells started to ring again and the stock market along with carry trades plummeted once again, giving dollar the bizarre rise. All traders were wondering why dollar was bid all across the board after the bad data, but the answer is simple: Everyone is aware now that US economy is going through a difficult period to say the least and the worse is expected. Traders were selling the euro like it was going out of fashion and therefore EUR/USD continued its recent fall.

Today the picture is the same for the European currency and still we see that euro is weak against the dollar, with the pair not being able to move further up towards 1.47. As long as it holds 1.4680, pair is good for further fall towards 1.4530.

The economic calendar is almost empty with unit labor costs the only release out of US.

Traders will be positioning themselves for tomorrow’s important events, the BOE and ECB rate announcements. The Bank of England is widely expected to cut the rates by 25 bps and this is priced in the markets since last week. The latest economic data show slowing in the economy and worries of subprime mortgage effects in the UK economy are starting to show. Analysts predict that the Bank might continue easing the rates in the coming months and therefore the pound might suffer more against its other counterparts.

GBP/USD is trading within tight range today and after the big move yesterday there are many fake signals which show the uncertainty of the traders ahead of tomorrow’s meeting. A clear break of 1.9560 might put 1.9530 back in the picture.

EUR/USD is trading still in a downward trend and clear break of 1.9590 will expose stops, eventually taking the rate down towards 1.9550 ahead of 1.95. Tomorrow’s interview by Trichet will make or break euro as many believe that his words will be dovish maybe signaling a rate cut in the coming months, following the lead of FED and BOE. The data out of Euro zone showed yesterday that the economy is starting to suffer what with the strong euro and the subprime woes being the main catalysts. However, if Trichet continue to stand by his decision not to cut but even maybe rise later on in the year, euro will climb up against the dollar and 1.50 might come back in play.

All will be confirmed tomorrow as we have a very important day full of events that either will make or break the recent dollar rally…

Published on  Wed, Feb 6 2008, 16:27 GMT