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Forex Trading Strategies
Trichet rhetoric erases the rally he created in the first place. EUR/USD may be set to fall again and may focus on 1.1500.
FOMC minutes up today - after recent fixed income rally in the US, could we have developed a little "surprise side" if the minutes show continued hawkishness?
MAJOR HEADLINES – PREVIOUS SESSION
• US Leading Indicators for October out at 0.9% vs. 0.8% expected
• Japan Tertiary Industry Index for September out at -0.7% vs. -0.4% expected, All Industry Activity Index out at -0.4% vs. -0.1% expected
• ECB's Trichet was out yesterday and made a number of comments that seemed to contradict the recent impression of a more hawkish stance.
Market Moves
EUR/USD reversed quickly late yesterday back below 1.1750, USD/JPY squeezed higher through 109.00 and EUR/JPY was pushed back below 140.00 again.
THEMES TO WATCH – UPCOMING SESSION
Trichet's rhetoric was rather surprising yesterday - as the price action in the market makes obvious. Although Trichet outlined all the reasons that inflation is high and why the ECB should hike - the usual hawkish spiel with examples of too much credit growth and negative real rates - he suddenly said later in the question and answer session that any rate move was not "the start of a series of rate increases" and that the ECB is "not far away from a desired level of rates". These two bombs pulled the rug out from under the EUR in almost every cross, and here we are again back in the range as the fear is that the forward STIR market has probably priced in too many hikes even if a move at the ECB's next meeting next week is virtually guaranteed.
Looking at the charts, we see a classic short-term reversal formation - the top of which came precisely at 1.1830 area resistance - so our hopes of a follow through higher were only hopes and we are forced to keep the downisde view for now unless 1.1800 upside swing area is re-achieved. A move through 1.1640 now would seem to bring on a try lower to 1.1500. Let's see whether there's enough market interest this week to drive it lower right away, however. Also - the risk is that the market over-reacted to the Trichet comments and today will offer the highest risk of yet another reversal - so today is a bit of a "limbo". The EUR/JPY reversal is a bit more compelling on a technical basis, and a short there is worth consideration as an alternative.
Looking at today's data - the obvious highlight is the release of the FOMC minutes late in the US session. With the recent, sizable rally in US fixed income markets, one wonders whether there is space for the market to be at least mildly surprised by a still-hawkish Fed. We'll have a look and report on it tomorrow. If we at least get a "non-dovish" Fed today, though, then the probability leans to the side of a stronger USD - though USD/CAD is looking heavy as long as it stays below 1.1860...
We talked about a Chinese Yuan revaluation yesterday - but we'll have to put that one on hold until we see it - but the danger level increases on a move after this week. The only way to protect oneself on this development is through options anyway...worth consideration if one is extremely long the USD.
Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.
Risk warning
Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated.
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