Wednesday, January 28, 2009

US DOLLAR: ACTS OF DESPERATION?










By Kathy Lien (www.gftforex.com)
The Federal Reserve is currently holding a two day monetary policy meeting and it will be interesting to see whether they are desperate enough to introduce radical programs that can incite the enthusiasm of investors. With interest rates virtually at zero, a rate cut is not expected, but the central bank is under pressure to take further action. So far, their effort which includes 500bp of easing has helped to prevent the recession from turning into a depression but it has yet to stabilize the economy. The latest string of economic data indicates that the US economy is still on a downtrend and headed lower. The FOMC rate decision tomorrow could be a nonevent for the US dollar, but if the Federal Reserve is desperate enough, they still have the power to surprise the markets.


FOMC Rate Decision - 2 Analogies

There are two analogies that can help us understand the potential outcome for tomorrow’s rate decision. The Federal Reserve’s current position is similar to their situation in 2003, when interest rates were lower to 1 percent. At that time, rates were not expected to break the 1 percent level and the central bank made it known that their easing cycle had come to an end. From there on forward, until the market started speculating about the possibility of a rate hike, traders started to become indifferent to the Fed’s rate decisions since no changes were expected from the central bank. No changes are expected this time around so there may not be the same type of volatility that we have seen with past rate decisions. The second analogy is the Bank of Japan rate decision which investors hardly bat an eye at. For the FOMC meeting to matter, we will need to see acts of desperation from the Federal Reserve. Read our full FOMC Preview and see charts of previous FOMC price action at FX360.com.

AUD/USD: Currency in Play for Next 24 Hours

The currency in play for the upcoming 24 hours will be AUD/USD due to Westpac Leading Index from Australia released today at 23:30GMT or 6:30PM EST, followed by CPI at 00:30GMT or 7:30PM EST. Tomorrow, the Federal Reserve is expected to announce its interest rate decision around 19:15GMT or 2:15PM EST. After exiting the Sell Zone established through the Bollinger bands the day prior, the pair is on the verge of entering it once again, yet it still trades within Range Trading Zone. Current resistance is originating at the high of the day around 0.6720, which coincides with 20-day EMA. While support is placed at 0.6490, which is a 61.8% retracement of the lowest point reached in 2008 and the highest point reached in 2009. The pair might propose a continuation in a downward trend if it enters and closes within the sell zone which is structured below 0.6570. With a key economic release on the agenda for the upcoming 24 hours, it is likely that the pair will test either of the levels.

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