Daily Forex Update 7-13-2010

Yesterday's action could not have been more dull, today's action features a gigantic whipsaw!

Let's begin with the euro, which was traveling nicely down to our profit target area, due in large part to a Moody's downgrade of Portugal's debt. Having lowered it 2 notches, the euro came under pressure by increased default fears in the entire region. In theory, the rating agencies timing could not have been worse; making their statement just before a "critical" debt auction by Greece. However, Greece's auction went off without a hitch, with bonds being well bid, and plenty of cover. However, in the longer term scheme of things, we must always be wary of modern debt auctions and the "secret" machinations of central banks. The US could not have covered anywhere near all of it's debt requirements if it weren't for a large group of "undisclosed" bidders. Basically, it appears the Fed comes in on the sly and purchases what the treasury needs to sell, that has not been purchased by others. This is basically printing money to cover the debt. There were rumors about the ECB doing this for the last last Greek auction, and they are already flying around now about this one. Unfortunately as Central Banks are not open to audit, we can have no verification of these facts. But the rationale is pretty condemning.

The last several minutes as I write this have seen stellar moves in the pound and the euro, hopefully everyone was able to get their pound exit in.

So what has caused this massive move in the light of the Euro downgrade? Remember how I said yesterday that inflationary data can move markets? And that while the UK's current inflation reading was above the central bank target that they expected it to continue to fall? WELL, it didn't. The core CPI which was expected to come in at 2.8%, jumped to 3.1%, a very strong increase. In theory, that would lead the BoE (Bank of England) to consider raising it's interest rate in order to fight off inflation. The problem is, how can they possibly raise rates in the middle of a stalled recovery? Remember, the UK economy is no better off than the US or Europe, and could be arguably in worse shape. So how could the Central Bank raise rates now? We all have a pretty good idea of what that would do. Stocks would tank. Bonds would soar, and the US dollar would become the currency of favor as fear grips the heart of the financial world again. Remember, each month as the economies of the world look at their bond auction data, they are holding their breath with their fingers crossed that their interest rates are not going to increase. I'll be honest with you folks, these things are pretty scary. As I've often said, we have never been at a juncture like this in world history. It is entirely possible we could see orchestrated massive defaults by huge economies all at the same time. While I am by nature a currency trader, I would also advise you to have lots of gold, and if you can't afford that, then lots of silver near at hand. Just in case...

On the technical side of things, the GBP is putting in a big divergence on the hourly stochastic, with this latest move higher in price, not going higher on the stochastic indicator. This generally signals more downside ahead. Also, if we fail to trend much higher from here, we may have the 4H head and shoulders formation we were looking for last week. If so, a validation of that pattern would target 1.4675. Tomorrow's UK unemployment report should give us some idea of the next move in the sterling. For now we will continue to hold our first position, and look to enter a second a soon as possible.

The EUR is struggling now to get to 1.2650. We will keep our stop in place, as the downtrend is still intact, and we will look for more fallout from the Portugal downgrade to filter through the market after all the sizzle from the GBP inflation news has gone out.

Drop me a line if you have any questions, and be sure to watch your inbox for another long term entry on the sterling.

Happy Trading!

Bill

www.thefxtradingmasters.com
bill@thefxtradingmasters.com