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Dollar Gains As Investors Prepare For FOMC Report

Wed, Aug 11, 10:41 AM ET, by

Trading was very slow during the U.S. session on Monday.  By the end of the New York Session, both the EUR/USD and GBP/USD had moved significantly less than their respective normal daily ranges.  Then, as the Asian Markets opened up Monday evening, the Euro and Pound fell sharply as risk appetite took over heading into Tuesday's FOMC Report from the Federal Reserve.

During early London trading, the Euro and Pound both began moving up slightly, but the directional bias is clearly to the downside now.  Let's take a look at both pairs.

After the Euro's strong drop on Monday evening during the Asian session, we may lower levels still on the Euro.  Strong support is at the 1.3090 area; however, the area where the Euro has currently found support at 1.3135 is also a strong area, so price may hold here until the FOMC Report Tuesday afternoon.  European Central Bank Governing Council member Athanasios Orphanides is the Cyprus Central Bank Governor and on Monday he was a bit less cautious concerning the economic outlook in the EuroZone than Trichet was last Thursday at the ECB Press Conference.  During the Euro's incredible run up from its lows of 1.1875, it has met major resistance many times.  Each time the Euro has hit major resistance over the last two months, it has consolidated at the HI's and waited for further fundamental news to justify higher prices.  And each time, whether positive for the EuroZone or negative for the U.S., the news has come through and further supported the buying frenzy.  However, this most recent HI at 1.3333 did not act this way.  The very impressive move up on Friday as a result of Non-Farm Payroll was not able to sustain its gains.  Instead, it began to trickle down very slowly during the U.S. session on Monday before falling sharply during the Asian trading session Monday evening.

Now, the Euro has erased all of its NFP gains, and it has actually moved to the lows of last Thursday.  If the buying conviction was real on Friday, it should have been able to keep its gains intact.  The fact that sellers came in with such force on Monday could be evidence that the Euro is entering a period of correction versus the U.S. Dollar, which is a bit expected after a 1,500 pip move in 2 months.

The Pound
Similar to the Euro, the Pound has also given up all of its gains from Friday.  On Friday, the GBP/USD rose sharply in the direct aftermath of the NFP Report, but Monday, it fell slowly all day during New York trading session before picking up speed in the Asian session.  The Pound has now broken through key support in the 1.5820 area with a strong hourly close, and it retested the level and fell once again in early London trading Tuesday morning.  The Pound's inability to break back above the 5820 area is quite bearish and could be an indicator of further downside movement Tuesday.  Currently, there is not any positive news coming out of England to help justify higher prices in the Pound.  As we mentioned yesterday, the Bank of England will be releasing its Inflationary Report and Governor Mervyn King will be speaking on Wednesday morning, and these two events combined could give investors a clear directional bias for the Pound.  Now, there is simply a small bout of risk aversion present in the market as investors are not really willing to bid prices much higher before the FOMC Report Tuesday afternoon.

FOMC Report Impact On FX Prices

It's a bit tough to tell how the FOMC Report will affect currency prices.  Let's discuss several possibilities.  First of all, the market has been pricing in further quantitative easing measures from the Federal Reserve.  In fact, this has been the primary poison that has driven the U.S. Dollar lower in the last month, and two weeks ago when Fed Chairman Ben Bernanke testified before Congress, he stated the Fed may have to institute further QE measures in order stimulate a very anemic recovery in the United States.  If the FOMC Report does not hint toward further QE measures in the near term, we could see a bit of a relief rally in the U.S. Dollar, and the EUR/USD and GBP/USD may correct a few hundred pips.

However, if the FOMC Report does state the Fed will begin instituting further QE measures in the near term, then both of these pairs could very easily test their HI's from Friday in the next day or two.  When Bernanke was asked several weeks ago, he stated the Fed would not be instituting the QE measures in the near-term, but ensuing economic data out of the U.S. has showed continuing signs of a deteriorating economy, and this may be enough to push the Fed over the hump.

The other option is if the FOMC Report comes out quite dovish, markets may begin to move sideways.  If that happens, it could be a sign of a strong move to the downside in the coming days.  Over the last two months, when U.S. news comes out bad, the market has been selling the U.S. Dollar.  However, if risk aversion gets bad enough on a global scale, that is when we will most likely see an incredible rally in the U.S. Dollar as investors once again make a flight-to-quality.

As we stated yesterday, if the FOMC Report is dovish and that is followed up by a very strong CPI number tomorrow night, and the Governor King is extremely dovish on Wednesday morning, these key risk events could all combine to cause quite a significant rally in the U.S. Dollar.  For now, the bias is definitely to the downside on the Euro and Pound in the short-term.

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SDI Glossary: "Inflation" Definition
This Article's Word Cloud:   Asian   Dollar   Euro   FOMC   Friday   Governor   However   Monday   Pound   Report   Tuesday   area   been   before   bias   both   could   dovish   downside   during   evening   fell   from   further   gains   higher   last   market   measures   months   morning   move   near   news   over   prices   quite   rally   risk   session   strong   support   term   that   these   this   trading   very   when   will

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