U.S Earnings and Currencies

Volatility decreased across the board last week, as investors engaged in profit taking rather than opening new positions. Even though the start of the trading week presented rapid movement, the selling pressure quickly decreased towards the second half, a head of the holiday season.

U.S stocks plummeted during Monday’s session after a four-day rally, causing major movement on various currency pairs. The Dollar Index grabbed investors’ focus most of the week, as the Index came down to touch trend line support but failed to break it, lingering around its critical level of 84 points. In addition to the U.S equity market’s normal effect on currencies, earning season kicked off in the U.S, showing companies’ earnings for the 1st quarter. Furthermore, two central banks (RBA and BOE) both released their interest rate statements.

Earning Season has Started

While most Forex traders normally don’t take into consideration companies’ earnings as the statements normally affect only the stock market, this quarter could be quite different.
Earning season is classed as a time when companies release their earnings for the previous quarter. For example, the earnings that are currently being released are showing how companies held up during the first 3 months of 2009 (the 1st quarter). Earnings will be closely watched by all types of traders this quarter, as better than expected statements could increase the appetite for risk taking across the tradable markets. 

One must note that to date, analysts are expecting poor results from large cap companies. Should those results come out better than expected, it could spark a major turnaround in investors’ sentiment, something that could lead to an increase in carry trade popularity.
On the other hand, if companies show worse than expected results, those reports will reflect on the markets and will force central bank officials to use further methods to battle the ongoing crisis. This scenario could send the Dollar higher against its counterparts, as investors will seek safe haven.

Example: Wells Fargo released on Thursday that it is projecting record profits and stated that its revenue would grow by an estimated 16%. The move immediately sent stocks soaring and Dollar counterpart rising during the intraday session.

Another Two Interest Rate Decisions are Behind Us

From a fundamental point of view, the RBA announced a 0.25% rate cut, bringing its central rate down do its lowest level in 49 years. According to the Bank’s statement following the decision, Australia’s economy is still going through troublesome times, characterized by slow growth and battered consumer sentiment. According to statistics, the Australian economy is now in a recession and is showing a growth rate of only 0.3%. By taking a glance at the following chart, one can see the steep decline in economic growth that started in January 2008.

Across the other side of the Globe, England’s economy is showing more of a dour state. To date, the Bank of England has shifted up to 5th gear regarding its quantitative easing methods and is now requiring only another 2 months to complete its asset purchasing program. The central bank’s aim is to buy up gilts (bonds issued in England) from city investors through a series of auctions, hoping that those investors will then put the money in their U.K bank accounts, boosting banks’ depositing, eventually easing the credit crisis.

To date, numerous central banks are now using quantitative method – meaning, buying up long term bonds and injecting cash into the financial system. Economists are pessimistic about these methods, as many are now claiming that the additional cash in the system will stoke price inflation.

Conclusion

 The last couple of weeks have presented a miraculous turnaround on the various currency pairs. Economic data is still showing a mixed picture, but central banks are now dealing with the problems. Not even high unemployment results stopped the equity markets from rising this week, a situation that sparked bullish momentum on the Euro, Pound and Australian Dollar. An increase in momentum will appear once the Dollar looses its title as a safe haven, meaning that the Dollar index breaks its current critical level of 84 points.

Market-moving-data is scheduled to be released this week, but due to the low volume one shouldn’t expect any major moves. Apart from the normal speeches and bank statements, inflation data is expected to be released in the U.S and Europe. Investors will be keeping a close eye on the CPI result from Europe, as rising inflation could prevent the European Central bank from reducing its rate at its next meeting.

Technical Analysis

EUR/USD

After Monday’s massive drop the EUR/USD pair managed to find support around its previous low of 1.3150. To date the price pattern has formed a wedge on critical support. Even though economic data is showing a gloomy picture indicators are starting to curve, meaning that the chart could bounce higher. For long term bullish traders a break of 1.37 is required to determine a change in trend. Shorter term bullish players can use a trend line break as confirmation, with target levels around major resistance. A break of support will signal short positions.

 

GBP/USD

Even though the Pound is holding its ground against the USD, divergence is appearing on the indicators. As mentioned above, the BOE is now engaging in numerous methods to help its economy, something that could boost the Pound’s value. Two critical levels should be observed on this chart; resistance of 1.4958 and trend line support.

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AUD/USD

After rallying higher despite a 0.25% rate cut the Australian Dollar hit resistance of 0.7239. Even though relative strength indicators (RSI) are currently pointing towards weakness, a break of resistance could lead this pair to much higher levels.

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Source by Jeff