Forex Analysis

The Fed said yesterday it will make up to $24 billion available to the ECB and SNB to increase the supply of dollars in Europe. It plans four auctions to add as much as $40 billion of cash in the U.S. This announcement was intended to calm down the markets, but actually it caused more volatility. Probably it will take at least a few days for the market participants the assess what exactly happened yesterday and what will be its long-term impact. Until then the volatility will probably persist, helped additionally by thin market conditions in the last month of the year. Most of the small or novice traders will be better off if just watch the price action and gain more experience.

The EUR/USD currency pair is still confined between the broken uptrend line and the upper boundary of the flag formation. Even the higher volatility yesterday couldn’t help to find a direction. Today I picked 1H chart where we can see clearly the support level @ 1.4640 and the resistance @ 1.4750. One of these two levels should be broken for finding the next direction of the forex market movement. Until then we can play the range by buying at the support and selling at the resistance with tight stops.

FOMC “surprised” the markets, but couldn’t move EUR/USD above the broken uptrend line, or the below the upper boundary of the flag formation. The forex market is still looking for direction. Key level for the upside is 1.4770 and for the downside - 1.4520. Until one of these levels are taken out, play the range with tight stops.

The market participants were “dissapointed” by yesterday’s FED move. FOMC cut by only 25 bp both rates. It’s strange why the market expectations changed during the last few days even after the stronger NFP report last Friday. I think the answer is simple. If the FED meets always the market expectations after the decision is announced the price movements will be very small and so will be the big boys’ profits. High volatility comes only after “suprises”. So the game plan is simple. Before the FED decision or major news release Big boys shift the market expectations in one direction. After the event they are “suprised” by the FOMC move or the actual data and they jump on the breeks and mak e “sudden”U-turn. All the public is surprised both by the data and the price direction change.

What can we do to avoid losses cause from such surprises? Next time when FOMC meets don’t read the expert’s comments but the real data. Or just don’t trade during major events.

Some big Russian companies and banks made a lot of money from the high commodities prices. Now they multiply these profits on the forex market. Almost every morning around 7:00 GMT they move the major currency pairs by at least 20 pips. They usually buy GBP/USD and EUR/USD. This excersise is possible beacuse of the thin liquidity before the European open.

We can profit from these moves either if we buy/sell near the Asian session low/hi around 7:00 GMT, or if we fake the rallies if they reach the other extreme after 20-30 pips. On the chart below you can see the move from this morning (12/11/2007). It started exactly at 7:00 GMT and lasted for almost 50 pips.

EUR/USD is trying to break back above its uptrend line. The momentum oscilator is climbing but remains below the signal line. The market should close above yesterday’s high @ 1.4736 to regain strenght for test of the all time high 1.4967. The direction of the pair will be determined by the FOMC decision later today. A 50 bp cut will be clearly negative for the US dolar while no change or hawkish statement will be positive and should lead to a test of the 1.4520 support. A 25 bp cut is already priced in and next moves will depend on forex market participants interpretation of the accopmanying statement.

GBP/USD is back above 2.0240 and 2.0350. Breakdonws of the support levels were not sustained and the currency pair is heading again towards 2.0515 and 2.0585. GBP/USD is contained within the boundaries of a bullish assymetrical triangle formation. MACD and Momentum indicators are in negative territory which in combaination of the BoE rate cuts signals more donwside. The rally in GBP today was supported mainly by Russians and they have shown as far that the only factor in the forex market is MONEY.

EUR/USD is still on crossroads. The pair consolidates between the the broken uptrend line (currently @ 1.4700) and the lower boundary of a flag formation (currently @ 1.4450). Very strong support is between 1.4490 and 1.4520 (200 DMA, a few previous daily highs and lows, lower Bollinger band). If this support holds and EUR/USD climbs above 1.4700 again, the uptrend should resume with next targets 1.4783 and 1.4967. The intraday price action shows the bulls ate still in the driving seat and still hold very strong bids around 1.4520.

Today is teh NFP day. The US Employment report is probably the most important of all the market moving events. Today’s NFP will  probably afect the markets more than usually because it precedes  very important  FOMC meeting.  If today we see  number greater that 100K  FED may skip this rate cut or may cut by 25 bp and change the statement. This could boost the Dollar and send EUR/USD below 1.4520 and GBP/USD below 2.0180.

After the ECB press conference the EUR was supported by Mr. Trichet  inflation concerns. EUR/USD rallied and now it is testing the broken uptrend line which is resistance currently. If this holds we may expect another sell off and test of the lower boundary of a bull flag formation which coincides with the swing low @ 1.4520. If this support is broken next targets are 1.4355 and 1.4280.

BoE cut the rates today but GBP/USD brokern the strong support level @ 2.0240 before the decision. If today the market closes below the broken support we can see a tets of the uptrend line @ 2.0070/80.