Forex market speculate on aggressive Federal Reserve rate cut

The Dollar fell against the Yen and the Euro on Tuesday on speculation the Federal Reserve could cut interest rates aggressively next week to calm market concerns over the credit turmoil and tightening liquidity. Interest rate futures are pricing in a roughly 50% implied chance of a 0.50% point Fed cut, while a 25 basis points cut to 4.25% has been fully priced in. The Bank of Canada cited expectations of more global financial market difficulties linked to the US sub-prime mortgage market leads its decision to cut its overnight lending rate 25bp to 4.25%. European Central Bank and Bank of England's rate decision are due on Thursday.


News and Events:
The Dollar fell against the Yen and the Euro on Tuesday on speculation the Federal Reserve could cut interest rates aggressively next week to calm market concerns over the credit turmoil and tightening liquidity. This follows a surprise interest rate cut by the Bank of Canada, which heightened expectations the Bank of England could also ease monetary policy this week and backed the view that central banks were becoming more worried by the credit crisis. The Bank of Canada cited expectations of more global financial market difficulties linked to the US sub-prime mortgage market leads its decision to cut its overnight lending rate 25bp to 4.25%. Interest rate futures are pricing in a roughly 50% implied chance of a 0.50% point Fed cut, while a 25 basis points cut to 4.25% has been fully priced in. An aggressive cut would not only further reduce the appeal of Dollar-denominated assets but leave the market more worried than it already was about the US economy, analysts said. EurUsd was up 0.65% at 1.4763. UsdJpy fell 0.53% to 109.85 and UsdChf dropped 0.9% to 1.1171, with investors reducing exposure to risk as liquidity tightens ahead of the year-end. The surprise BoC decision sent the Canadian dollar tumbling. UsdCad jumped to a near 11-week high of 1.0153 and closed at 1.0121 up 1.16%. The high-yielding Australian dollar was knocked lower ahead of a verdict on interest rates by that country's central bank today. AudUsd fell 0.97% to 0.8722. Analysts do not expect Australia's monetary authorities to follow their Canadian counterparts. European Central Bank and Bank of England's rate decision are due on Thursday. Cable traded down 0.26% at 2.0583.




Today's Key Issues (time in GMT):

08:30 EUR ECB’s Trichet speaks in Berlin
10:00 EUR October Euro zone Retail Sales -0.3% vs 0.3% (MoM)
10:00 EUR October Euro zone Retail Sales 1.3% vs 1.6% (YoY)
10:30 GBP November BRC shop Price Index
12:00 USD MBA Purchase Index
13:15 USD November ADP Employment Change 50k vs 106k
15:00 USD November Non-Manufacturing 55 vs 55.8
15:00 USD October Factory orders 0% vs 0.2%
16:45 USD Treasury’s Paulson speaks on US-China relations, Washington



The Risk Today:

EurUsd Euro is searching for direction after having pull back from last Friday 23rd November record high 1.4967. It might return down to two weeks ago support on 1.4520. On the downside, only a return below 1.4500 and further drop to 1.4280 former resistance would threaten the last 3 months uptrend. This could open the way down toward 1.4000 nearby support and 1.4125 trendline support. Initial resistance holds 1.4723 former support.

GbpUsd Cable is breaking down 2.0550 – 2.0600 range support heading down to 2.0354 mid-November low. On the upside, 2.0833 Nov 28th high marks the strong resistance before putting 2.1161 trend high and 2.1355 May 11th 1981 into focus. Initial resistance holds 2.0700 Friday high. On the downside, a return below 2.0525 may open a market reversal. But it would need renewed pressure below 2.0200 and further weakness toward 2.0000 psychological levels to validate a downtrend. Initial support holds 2.0447 early today low.

UsdJpy Downtrend might have end with November. Last Friday break up 110 level had put 114 into focus. This may open the way toward 117.63 resistance. On the downtrend, supports hold 106.50 June 2005 low and 101.68 January 2005 low. Initial support holds 110 minor. Initial resistance holds 111.23 Friday high.

UsdChf Downtrend remains heavy, even with last week 4 positive sessions started on 1.0888 23rd November low. Market had found support on 1.1000 key level. Initial resistance holds 1.1300 (12th Nov) high. It would also need a return over 1.1500 and 1.1640 level to relieve actual bear threat. Initial support holds 1.1160 yesterday low.


Resistance and Support:




By Jean-Claude Braha - ACM Advanced Currency Markets, Geneva, Switzerland