Independant Analyst: Lena Manousarides 29th October

publication date: Oct 29, 2008

Crucial FED Decision for Dollar Direction…

Yesterday was the first positive day for all global markets, after last Friday’s nonstop collapse. DOW JONES and NIKEI printed heavy gains and the same is happening this morning with European markets. The sentiment though is far from positive yet and traders are still waiting the point which everything will continue falling again!
EUR/USD broke 1.28 and printed a new high for now at 1.2850. The move was strong enough and as long as 1.25 doesn’t give way, there is more scope for 1.2980 or even 1.30. However, in order for this to happen we need to have a risk aversion free environment.
Today we have the durable goods orders from US which is expected a bit better than last month; however with the current economic conditions in US and the record low consumer sentiment, it’s possible that the number will be bad once again. The most important event of the day is FOMC meeting later on today and traders are waiting patiently to hear what Bernanke and co have to say for themselves in regards to the current financial crisis and the inflationary pressures. The forecasts are showing that FED will cut rates by 50 points today and maybe more in the next meeting. Some analysts are even predicting the current financial crisis may force FED to take stricter measures and cut by 75 or even 100 points. That scenario is extreme, but in extreme times we need extreme measures. My feeling is the Bank will maybe cut rates by another 25 or 50 points today, so they can have room to cut again if needed in the next few weeks.
Oil is still trading on the defensive, however for now it seems that $60 per barrel is still intact. The next potential sell off though could easily take out $60 per barrel and have oil drop even further towards $50 per barrel. It will all depend on the global worries and fears from investors and if we get another “black” trading day then anything is possible.
The question now that arises after yesterday’s gains in euro and DOW JONES, is if this move continues today or even till the end of the week. Everything in the charts so far shows that EUR/USD has further room for gains and yesterday’s closing candle is the first positive for a long time. The fact that traders anticipate FED to cut rates might give further weakness in the dollar and therefore to help the euro appreciate more. As we said before though, times like the ones we experience now are far from normal and something that we took for granted before might just not work anymore.
So, it is imperative to see what happens tonight after the FED decision and also listen to Bernanke’s statement for hawkish signs because that can cause the  dollar to regain its losses in an instant. Let’s not forget that next week we have the ECB decision and traders are already pricing in another cut from the Bank.
Whatever happens today, one thing is for sure: things will get interesting right about FED decision time and it will be crucial for markets direction to see today’s New York closing.