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FX daily Commentary

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Crunch Time for the Dollar! Mr. Trichet has spoken...

Fri, Oct 3 2008, 10:22 GMT
by Lena Manousarides

FXGreece

The bank has opened the door for cuts! The inflationary pressures have been diminished as he said, but they have not disappeared. He spoke to the reporters concerning the slowing of the European economy, which is equally as affected by the global economic crisis. His tone was far more dovish than anticipated, and the traders “honored” his words, by heavily selling the European currency against the dollar and other currencies too.

The EUR/USD broke important support levels of 1.38 easily and printed a new low of 1.3740. The move was erratic and violent and stops were hit at once. However, the move was not strong enough to break lower and we had an immediate reaction back above 1.38. Today the pair is correcting further and as long as it holds 1.38 as support there is room for further gains.

The market today awaits two big events: the Non-farm payroll data and the House’s decision regarding the bailout plan. The payroll data is expected to print another negative month at -100.000, however the market was already priced in the number and in order to see some serious dollar weakness, the number has to be worse than that. Let’s not forget that these days the theme is “buy the buck” regardless of the situation and it probably won’t change for some time. It will be interesting to see how the market reacts to this news and if at the end it is proved as a non-event.

The other important event today is the bailout plan decision expected sometime later. Analysts expect that the House will finally accept the plan today, however if we have another rejection, the dollar and the global markets will be pressured. The result will be crucial, as the fates of many investors depend on it! Let’s not forget when Congress said a big fat NO to the plan and how the market reacted, this time the markets message is clear: If the plan is not passed, global markets will collapse!

So, it will be interesting to see the trader’s reaction to the news and how it will be traded afterwards. We are all aware that no matter what the economic data of the US and the state of the economy, the dollar is getting stronger by the day. How long can it last though? The charts are saying potentially 1.35 at the least. However fundamentally even with the bailout plan, the US economy is far from ready for a strong dollar, what with the wide trade balance and the high unemployment numbers and the prospect of recession being very high too.

EUR/USD is trading higher going into the New York opening and if 1.3920 gives way, then the pair has 1.3980-1.40 as its next resistance.

GBP/USD is trading higher too, but not with the same heavy tone as the UK data today was disappointing, therefore we need to see a clear break of 1.7780-1.7820 in order to say the pair will gain further.

Published on  Fri, Oct 3 2008, 10:23 GMT