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Daily Analysis

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Dollar fell to a two−year low as Fed dropped tightening bias

Thu, Mar 22 2007, 02:27 GMT
by Sarah Vladimirsky

Finotec Group Inc.

Main news:

• Sterling pared gains versus the euro after the BOE minutes
• Crude oil rose above $60 after U.S. gasoline supply declined

Market Trend

Forex Outlook:

The dollar slid to a two-year low against the euro on Wednesday after the Federal Reserve kept the benchmark interest rate steady but dropped a reference in its statement to possible further interest rate increases. Though the Fed reiterated that inflation remains a concern, investors interpreted the language change as a sign that an interest rate cut may be near. The Fed has repeatedly warned of upside inflation risks, and consumer prices have indeed shown little sign of moving back below 2 percent, the upper end of the Fed's comfort zone. The dollar declined 0.5 percent to $1.3388 per euro. It touched $1.3389, the lowest since March 2005, after rising earlier on expectations the Fed would highlight risks of inflation over slowing growth. Fed's statement left the dollar vulnerable, especially to higher-yielding currencies such as the euro. Markets expect euro zone rates to rise further this year from the current 3.75 percent.

Sterling erased earlier gains against the euro on Wednesday after minutes of the latest Bank of England policy makers meeting showed an 8-1 vote to keep the benchmark rate at a five-year high this month. The rate-setting panel, led by Governor Mervyn King, said they remained concerned about inflation in the longer term. The pound climbed the most in two months versus the euro on Tuesday after a report showed consumer prices unexpectedly quickened last month, staying above the Bank of England's 2 percent target.

With this week's major data out of the way, investors' attention now turns to the retail sales figure in the U.K today. Moreover, Federal Reserve Chairman Bernanke will give brief welcoming remarks before the Federal Reserve's Credit Derivatives Conference, in Washington.

Gold: Gold prices rose for a fifth straight session on Wednesday, touching their highest level in almost three weeks, as the market chased a rally in crude oil. Gold also gained support from the weakening dollar after Federal Reserve officials unexpectedly abandoned their bias toward higher interest rates. Gold futures rose 0.8 percent to $665 an ounce. 'The dollar weakness is the catalyst for gold's gains,' said Frank Lesh, a trader at FuturePath Trading LLC. 'We've upped our odds for rate cuts in the second half.'

Crude Oil: Crude oil rose above $60 a barrel on Wednesday after a government report showed that U.S. gasoline supplies fell for a sixth straight week as refiners increased operating rates, raising worries of a crunch leading into the summer driving season. Gasoline stocks fell 3.4 million barrels last week, extending a decline in inventories that has brought them more than 7 percent below where they were in early February. Besides the drop in gasoline stocks, the EIA report showed a 1.7 million barrel fall in distillates and a 4 million barrels rise in crude inventories.

Pool Position

Economic Calendar

EUR/USD Daily Technical Reports

Spot Price: 1.3384

Technical Analysis:

Longs in play as prices breach major resistance at 1.3365. Next resistance is a weekly high at 1.3480 from 2 years ago and we will flat a failure at this level. With RSI showing overbought, on the downside, support on the hourlies is at 1.3345 and 1.3325 and our stop is placed below there.

USD/JPY Daily Technical Reports

Spot Price: 117.53

Technical Analysis:

With 118.00 still capping prices, the danger remains for a pullback towards the low at 116.95. There's a 50% retracement level just below there currently being bolstered by an hourly trend line. Play the extremes of this 116.95-118.00 range for the short term.

GBP/USD Daily Technical Reports

Spot Price: 1.9684

Technical Analysis:

Having booked profits on our previous long position we are long again as the market breached resistance at 1.9675. The pullback since this break has been limited so far and prior highs at 1.9650 provide the first support level. We will adjust the loss and profit targets on this trade as the market develops.

USD/CHF Daily Technical Reports

Spot Price: 1.2089

Technical Analysis:

Fresh shorts taken on Wednesday morning as prices stall ahead of previous support at 1.2110. We have placed our stop above Tuesday's hourly high at 1.2170. Recent downtrend remains the strongest technical factor. Initial support is at 1.2030 and our target lies below there at 1.1985.

Published on  Thu, Mar 22 2007, 02:31 GMT