USD Reversal Generates Strength for Most of the Majors

Daily Forex Technicals | Written by FOREXYARD | Oct 30 08 |

USD Reversal Generates Strength for Most of the Majors

Yesterday's interest rate cut by the U.S. Federal Reserve has made the USD drop in value across the board. The Dollar was already beginning to trade above $1.3200 per EUR in today's early trading sessions, after dropping 2.2 % yesterday, and has also climbed above 1.6500 against the GBP. Crude Oil prices have also begun to reach back up to the $70 price level!

Market Trend

	EUR/USD	GBP/USD	USD/JPY	USD/CHF	AUD/USD	EUR/GBP
Daily Trend
Weekly Trend
Resistance	1.3300	1.6715	99.90	1.1400	0.6956	0.8060
	1.3260	1.6680	99.56	1.1365	0.6925	0.8024
	1.3215	1.6635	99.15	1.1320	0.6880	0.7975
Support	1.3120	1.6524	98.00	1.1218	0.6800	0.7900
	1.3085	1.6490	97.60	1.1185	0.6777	0.7876
	1.3049	1.6470	97.35	1.1155	0.6729	0.7845

Economic News

USD - Interest Rate Cut Creates Massive One-Day Loss for USD

In a move anticipated by most market analysts, the Federal Reserve cut target lending rates yesterday to a level not seen in almost 50 years! This was done in an attempt to prevent a widening financial crisis from tipping the U.S. economy into a prolonged recession. It was not the first time the Fed cut rates to stave off further economic disaster during these most recent times of financial hardship.

Less than a month ago the Fed joined the European Central Bank (ECB), as well as other counterparts from the U.K., Canada, Sweden and Switzerland, in a coordinated reduction of interest rates, cutting its target rate by a half percentage point to 1.50%. Now, as a result of yesterday's further rate cut, the Dollar posted its biggest one-day fall against almost all of its major currency counterparts.

The Dollar was already beginning to trade above $1.3200 per EUR in today's early trading sessions, after dropping 2.2 % yesterday, and has also climbed above 1.6500 against the GBP. The Fed may also be expected to lower benchmark interest rates even further in the coming months given the downbeat economic outlook provided by the Fed's policy statement yesterday.

The market has been trading on a recovery theme lately; there is still a lot of uncertainty, and risk aversion is very much in place. If risk appetite continues improving, the Dollar may get even weaker. Despite showing signs of recession in the U.S. economy, the Fed's maneuver put the focus on the interest rate differential, and that might force the Dollar to go even lower no matter how the Advanced GDP figures appear when they are released later today.

EUR - EUR Finds its Strength from Weakened USD

The EUR rose against the Dollar to 1.3200, marking a distinct rebound from last week's doldrums. The 15-nation currency rallied after the U.S. Federal Reserve slashed its target rates by half a percentage point yesterday and also left the door open to further reductions if needed. The EUR made further gains following Germany's announcement of its preparation of an economic stimulus package. Deutsch Bank AG, the largest bank in Germany, also declared surprising profits after implementing a change to its accounting rules.

The USD no longer appears to be a save-haven for traders after the Federal Reserve released a statement that the pace of economic activity appears to have slowed significantly. The British Pound has also advanced against the Dollar as a report showed that mortgage approvals rose for the first time since June 2007.

The Bank of England (BoE) said lenders approved 1,000 more home loans last month than in August, and the government is expected to pledge extra borrowing today to support the economy as it enters its first recession since 1992. The Pound had its biggest intra-day decline versus the Dollar on Oct. 24, when a government report showed the economy contracted in the 3rd quarter by more than twice as much as economists predicted. This indicates that economic news is beginning to once again have a larger impact on the movement of the major currencies.

While appearing to gain strength recently, the EUR may in fact see a reversal to yesterday's giant upswing. News being released from the Euro-Zone today will likely show higher-than-expected unemployment in Germany and decreased consumer confidence throughout the region. While indicators have had less impact these past weeks due to the financial crisis, they nevertheless still carry weight in the confidence of investors; any negative economic data will have the potential to cause harm to the currency's value.

JPY - JPY's Excessive Volatility Ending as Japan Considers Cutting Interest Rates

As the market's speculation increases that the Bank of Japan (BoJ) will lower its interest rates, the Yen fell for a second day against its currency counterparts, extending its largest ever decline. The first motivation for a potential rate cut is to stem the Yen's appreciation; another motivation is to try to prop up the economy.

Yesterday, Japan's currency dropped 0.5% versus the pound to 156.47 on speculation investors will revive carry trades. In carry trades, investors borrow in currencies with low interest rates and invest in currencies with a higher yield. Japan's target rate of 0.5% is the lowest among major economies. The potential BoJ rate cut led to an unwinding of safe-haven flows to the JPY. Perhaps what has been driving the Yen to its recent strength is not speculation, but the repatriation of Japanese investors and de-leveraging by global investors.

The Group of Seven (G7) issued an unscheduled statement on Oct. 27 saying it was concerned about 'the recent excessive volatility' in the JPY. The Japanese government has also stated that it may intervene in foreign exchange markets by arranging purchases and sales of currencies, if necessary.

Technical News

EUR/USD

The pair continues to make bullish sounds, and is currently testing the 1.3200 level. However, it appears that the 1.3250 level has now become a strong resistance level, and a breach of that level might validate the continuation of the upward move.

GBP/USD

There is a very accurate bullish channel forming on the 4-hour chart as the cable is now floating in the middle of it. The RSI on the daily chart has crossed the 30 line, and the Slow Stochastic is still pointing up, all suggesting that another bullish session is pending. Going long appears to be the right choice today.

USD/JPY

Ever since bottoming at the 91.00 level, the pair has entered a very strong bullish trend and is currently traded around the 98.70 level. And now, a flag formation on the 4-hour chart suggests that the bullish move has more room to go.

USD/CHF

A very sharp bearish movement took place yesterday, as the pair dropped over 300 pips. The current price is floating beneath the Bollinger Bands lower border, indicating that the bearish move is still quite strong. Going short appears to be the right strategy today.