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Forex Trading StrategiesNew Fed chief is the main event up later today. Testimony and Q&A session may make for volatile North American session.
Markets seemed to be pulling in their leverage late yesterday as the USD eased weaker again ahead of Bernanke's testimony.
MAJOR HEADLINES â€“ PREVIOUS SESSION
â€˘ US Business Inventories for December rose +0.7% vs. +0.5% expected
â€˘ US Weekly Consumer Confidence rose to -11 from -13
â€˘ Australia Westpac Leading Index rose 0.3% in December
â€˘ US Fed's Lacker said in an interview yesterday that he would focus on core inflation and repeated that further rate increases may be needed.
â€˘ Japan final revision for January Machine Tool Orders at 5.4% vs. the 5.0% first estimated.
USD and especially JPY were weak overnight, while AUD rebounded.
THEMES TO WATCH â€“ UPCOMING SESSION
Yet another example of a market that can't make up its mind what to do, as USD/CAD breaks higher through the big 1.1560/80 zone yesterday and can't hold the new territory before swooning lower. The lack of follow-through may have to do with insufficient pressure in the market with many likely sidelined until after they see what the coming days of Fed rhetoric have to offer.
While the US Retail Sales saw the highest growth since the month after 9/11, the market was clearly not willing to push the USD with as important an event as today and tomorrow's testimony from Bernanke looming. Remember, that Bernanke will first issue a speech (the full text is available before he actually reads it all) which will then be followed by a Q&A session. This latter session can easily last a couple of hours - so the market may gyrate all over the place from the release of the statement until the Q&A session is wrapped up. I expect a command performance from the new chairman and expect him to use very balanced and well thought-out language that indicates there may be room for further hikes, but also stressing of risks in the economy. And don't forget before you pull the trigger - he'll have another Q&A session tomorrow!
The key in all of this is the difference between what Bernanke actually says and the "anticipation premium" already built into the market. And clearly the market is expecting some pretty hawkish rhetoric as measured by the last three weeks of moves in the STIR futures markets. And over the last two weeks, the Euribor is pricing in a more dovish ECB - so the two region's interest rates have been heading 180 degrees from one another. This is what has brought EUR/USD from 1.2300 to 1.1900. The classic pattern of the market is to way over anticipate an event like this - so, at least for the short-term, we see a sharp USD correction lower as the higher probability scenario unless Bernanke really surprises. But it's far to earlier to say whether this could blossom into a new weak USD trend further down the road.
Note: the support/resistance levels used in the matrixâ€™s 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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