US government Coming to rescue the economy, but what about the USD?

At the end of last week, the US treasury and Central Bank announced the plan to rescue banks from their infected mortgage loans. This is focused on saving more banks from going into bankruptcy and promoting a chain reaction that would send our financial systems to the equivalent of a financial ‘middle age’. However some investors are not that happy with US officials stepping in to save the big guys with American’s tax money. This week we will see the resolution by congress and they will probably accept the plan so lets analyze what can happen.   It might certainly be a fiscal plan to come up with all that money needed for the Bailout.

Let’s assume the plan is accepted and the FED steps in to save banks; what’s the effect we will see on the EUR/USD pair? We believe it will initially be USD negative and take the pair from low 1.42’s we saw last week, all the way to high 1.47’s. However on the medium and long term this solution could be seen as an accelerated path to recovering strength on the US economy, this translates to booming markets and capital in-flow from foreign investors into US assets. We can surely take a hint and we’re seeing it at the stock re-buying taking place on the US by big companies as Microsoft and HP. They are predicting the recovery of the US economy and with this we might get a stronger USD. Well this sounds pretty easy and simple but here’s the trick, it will be extremely difficult to predict how high the pair will go on the initial move against the USD. We believe we will be in a range between 1.4200 and 1.4800. However we don’t discard the possibility of getting higher especially during a week as volatile as this one.

On weeks like this one, most fundamentals and technical analysis stop being important. Any change we get regarding this release will surely be the most important thing on the day. Keep an eye on any appearance by Ben Bernanke or any other Fed or Treasury official. Let’s also remember that Europe’s economy isn’t that healthy either so don’t discard an intervention by the ECB some day not that far away. Long term direction is still leaning towards 1.3000 in the long term, so you better stay protected (hedged) in the time being.

HIGH: 1.4845
LOW: 1.4400
CLOSE:1.4550

We’re back in the green channel. We expect EUR/USD to remain there for a while. However any release regarding the financial plan in the US could trigger a stronger move and take the pair out of the range.

Our analysis indicates Short EUR/USD every time it reaches 1.4800        

Take Profit 1:1.4740
Take Profit 2: 1.4650