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Forex Trading StrategiesMarket sends a clear signal yesterday as USD collapses. Fed policy to depend on "incoming data".
First trading day of the year sees a huge move. Follow-up move could see USD/JPY testing key 115.00 level and EUR/USD toward 1.2500.
MAJOR HEADLINES PREVIOUS SESSION
EuroZone PMI Manufacturing Surveys rose across the board in December, with the broadest EuroZone survey rising to 53.6 from 52.8 in November
Germany Unemployment dropped -110k vs. -8k expected in Decmeber and the Unemployment Rate dropped to 11.2% vs. 11.5% expected
UK Manufacturing PMI rose to 51.1 in December vs. 51.0 in November
US Construction Spending for November out at +0.2% vs. +0.7% expected
US ISM Manufacturing for December out at 54.2 vs. 57.5 expected
US ISM Prices Paid for December for December out at 63.0 vs. 68.7 expected
US FOMC Minutes from Dec. 13 meeting show out late yesterday the Fed in a quandary over how to relay its stance on rates to the market as members were not in agreement over how much further rates had to go..
The USD extended weaker still in the Asian session after dramatically weakening for most of yesterday.
THEMES TO WATCH UPCOMING SESSION
We argued some time back that we would need to navigate the thin holiday trading sessions before we got a clear signal on what is going on - but hardly did we expect a move of this magnitude to unfold on the year's first real trading day as yesterday was a real head-spinner. A bit surprising to see the market viewing these FOMC minutes as being so dovish, when most of the language should be expected after the mid-December meeting saw the change in the monetary policy statement.
Apparently, the key words uttered by the Fed were the explicit expression that "policy outlook is considerably less certain" and that the Fed stance "would depend on incoming data". This basically expresses the view that, save for the inevitable hike at the January 31, "Greenspan's last hurrah" meeting, the Fed simply doesn't know at this point where it is going to take rates. This will inevitably increase market reactions to new data as it rolls in as with each data point, the market may take a new stance on what the Fed may do at the next meeting (all "next meetings" after Jan. 31, of course). While yesterday's ISM was the first point of "incoming data" we'll focus especially on housing relating data, Retail Sales and the inflation data going forward. The latter may pick-up again if the energy market keeps going haywire like we saw over th - but a Fed hiking because of spiking energy prices is less USD bullish than a Fed hiking because of robust growth and expansion numbers.
So with yesterday's move, we see the key being a "hold" above the 1.2000 level for EUR/USD as key for proof that we will see a bigger USD sell-off developing toward 1.2500. USD/JPY could focus on the massively significant 115.00 level. The next key "incoming data" will be the Thursday ISM Non-manufacturing number and the US Employment data on Friday.
Note: the support/resistance levels used in the matrixs of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.
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