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FX Daily Update

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Bernanke Could Make or Break the Dollar!

Tue, Dec 16 2008, 10:25 GMT
by Lena Manousarides

FXstreet.com Independent Analyst Team

Today is the day we all been waiting for…FED will tell us yet another month what their decision will be regarding the interest rates. The forecasts show that the bank might cut for 50 bps taking its rate down to 0.50%; however futures have already priced in a hefty 75 bps cut due to the latest deteriorating economic conditions.

Yesterday’s trading action found dollar bears clearly in control ahead of today’s FOMC meeting and the current market sentiment has returned to more “normal” conditions, where now we see negative economic data out of the US reflecting the US currency. Traders are losing their need to place their bets into the dollar for now and prefer to sell the greenback all across the board.

EUR/USD is trading higher since last week and continues to do so. Yesterday we saw a remarkable move to the upside, breaking important resistance levels and head towards 1.38. The daily highs were printed after the New York closing at 1.3740 which is the 38.2% correction of the whole move from 1.6040 down to 1.2330. Today the pair has retraced slightly what with traders not wanting to take more risks ahead of the decision. Next level to watch on the upside is 1.3780. It looks more than likely that after the FOMC decision later today, the pair will shows us its “true colors”.

The economic calendar has a few important releases today, with CPI out of UK which came slightly higher than expected, helping the pound sustain its recent upside move and also CPI out of the US, which will be monitored closely by all traders in order to see how the FED may act later tonight. The numbers are expected to come out lower and that will only fuel trader’s speculations that FED has the green light to go ahead and cut even more in order to stabilize the shrinking economy. Also we have Building permits and Housing starts out of the US, but these two are likely to be overshadowed by the other events.

Another interesting factor we see these days is that stocks do not follow dollars move and although we saw DOW JONES declining yesterday amid new worries for the global economy, dollar wasn’t bought as an aftermath, an event which we have witnessed many times in the last few months. Are traders aware now that the buck is not to be used as a safe haven currency? Although traders still buy the yen as risk aversion , however the dollar is not favored any more and that is yet to be determined if it will continue in the coming weeks.

One thing is for sure: Whatever happens later with the FED rate decision, the volatility is expected to be high at all times before and after the release. Traders will monitor the statement for any clues as to what the bank’s future plans are and how they assess the recurrent economic crisis. Bernanke has a tough job these days, and my feeling is if we see a heavier cut later today, that may be interpreted as a desperate and nervous move on FED’s part and be welcomed with another sell off wave all across the board…

Published on  Tue, Dec 16 2008, 10:29 GMT