Forex Trading TV Video Blog

The greenback is floating in relatively quite waters, after the storm caused by the feds surprise cut of 75 points two days ago. When taking a deeper a look at the USD behavior post cut we can see that the reaction of the USD was in fact softer than one would expect from such a radical move that was not seen since 9.11. This could partly be explained by the fact that the cut was partly priced in, as the crisis was quite strong and traders were expecting a massive cut.

Now there is a certain argument amongst some traders about whether the Fed will again lower its rates by at least a quarter of a percentage point next week. Others said it would depend on how Wall Street would perform for the rest of the week until their meeting on Tuesday.

These extreme cutting moves are aimed at boosting liquidity and easing the credit crunch, restoring confidence and encouraging consumers and businesses to start borrowing, investing and spending again to keep the world’s largest economy from slipping into a recession, although many predict that a recession might be inevitable.

As for today there are two major economical events expected to come from the US, the first is Unemployment Claims which is widely expected to be released at 320K after a previous figure of 301K, and the second is Existing Home Sales that is expected to remain at the 5 Million level, and will probably not generate strong volatility that is usually expected from housing data at this poor economical period.

US Treasury Secretary Henry Paulson will speak today about risk and the financial system at the World Economic Forum, in Switzerland. The speech might generate some choppy price movements, as those speeches often do.

It appears that if no other surprises will be pulled from the fed’s sleeve, we should se the Greenback continue to drop as a part the ongoing attempts to initiate the healing process for the American economy.

The greenback fell sharply against most of the majors yesterday after the Fed launched a surprise by deciding to cut both the Federal Fund Rate and the Discount Rate by 0.75% ahead of its next meeting on Jan 30. The Fed Fund Rate, which is the U.S inter-bank lending rate, was slashed from 4.25% to a surprising figure of 3.50%. This aggressive cut by the Fed is another cut in a series of last ditch attempts to help the struggling U.S economy avoid a recession by alleviating the underlying weakness that exists in the housing sector and the broader economy. Therefore the greenback depreciated sharply on the back of this rate cut because investing in the U.S economy is now less attractive to investors, so there should be a fall in the inflow of foreign funds especially now that the interest rate in the U.S has fallen below that of Eurozone, which is still at 4.00%. However carry trades and equity markets were boosted on the back of this news as investors viewed the Fed’s robust attempt to stimulate the U.S economy as a positive indication that there could be a future rebound in the U.S economic outlook. Therefore the greenback and most of the other high yielders appreciated against the JPY yesterday.

Now although this monetary expansion by the Fed will boost consumer spending significantly and therefore try to solve the problem of the housing sector and the credit crisis, the key question on trader’s minds is if the greenback will recover on the back of a more positive U.S economic outlook. In our opinion the U.S Trade Balance remains the missing piece in this complex puzzle as although the greenback has been weakening against the EUR for the latter part of 2007, U.S exports only gained fractionally on the EU and therefore the Fed can now only hope that this will change dramatically as the U.S trade deficit continues to widen. So a strong greenback is not at the top of the Fed priority list at the moment as they are using all means available to minimize the risk of an economic slowdown.

Nevertheless, many analysts believe that towards the second half of 2008 the U.S economy will climb out of this deep pit and it will be accompanied by a sustained USD rally. The Fed will also be keeping a close eye on inflation as although it is expected to remain moderate over the next few months, this aggressive rate cut could cause inflation to spike especially if we see an overreaction in consumer spending. Also the Fed’s objective to rebound the U.S economy will face a serious setback if commodities continue to rise any further.

Looking ahead, today there is no significant U.S data expected and the greenback should consolidate against most of the majors especially after yesterday’s sharp depreciation, as traders will begin to look ahead to Thursday’s key U.S Unemployment and Housing figures. However the greenback may still face some volatility today as a result of some key data releases from the Eurozone and UK. The short term outlook for the greenback remains very dark indeed, as the market prepares itself for another possible 50bps rate cut when the Fed meets next on Jan 30.