The aftermath of a Rate Hike

Written by JS T. Alexander | 20 February 2010

Friday, February 20, 2010
The Aftermath of a FED Rate Hike

FUNDMENTAL
The unexpected Federal discount rate hike since 2006 made by the bank was a surprise to the market as well as the traders. Although, we have addressed before in one of our articles that the more likely scenario for the Fed' to raise rates would be towards the second and third quarter of the year.

This is a clear signal that the Fed's stance may soon change as the economy still tries to recover from its recent crisis. And this could not have been more timely after the President have also addressed the creation of a commission to reduce the deficit down by 4% from the current 10% of GDP as its initial target headed by both a democrat and a republican.

With this said, the reaction of the Forex market have been more volatile than ever while it was awaiting for the rest of the numbers coming from, unemployment, homes sales, and the producer price index without mentioning the employment report from the UK and the most recent crisis of Greece and the rest of the European nations regarding their deficit / debt problems.

TECHNICAL
The overall case scenario on a fundamental standpoint weighed heavier for the USD to move higher with the barometer USDX registering a high of 81.25 bp for the week ending Feb 19, 2010. So where will the next USDX find it's reisistance will depend on the where its closing prices will end. But the obvious is still to move higher. That prompted the EUR/USD and the GBP/USD to move lower at 1.3443 and 1.5341 respectively. This also influenced the support price of the cross rate EUR/GBP to move higher currently working at 0.8780 from a low of 0.8601. You may find some guideline prices from our one page price indicator on analysis; which is really meant for this purpose. We would not be putting these prices if it was not that important.

FEB. 15, 2010 ( Before )

FEB 19, 2010

The opening of the week was a short term correction for the USD that produced a relative buying opportunity for the Euro and the Pound but lost momentum when due to the thin market holidays in Asia and the absence of the major players from the market. Although, the market's wide trading range lent to some traders and investors more confused as to where the actual direction of the market will prevail. But the underlying major trend has not change where the USD is still holding its strength. Pls. review our " UPDATE : Outlook for Feb 17 " which emphasized the momentum Lost on the correction and was highlighted with the yellow shade showing an engulfing candlestick bear bar indicating a price reversal back to the downtrend.

And the rate hike was the fundamental trigger for the USD to continue its upward trend as we always have stated since Dec. 22 in our article " USD Trend and Price Reversal " specially focusing for the 1st quarter of the year 2010.

On a technical view point, when an engulfing downward candlestick bar established for the EUR/USD and the GBP/USD on Feb.17 as shown on our Market View updated report; it was the signal that the continuation for the trend lower is back and just waiting for a fundamental news to push it lower. And that was the when the FED has done on a Thursday surprise move.

Note: A more detailed and latest Market Analysis can be found in the 4Cast ( Premium ) which provides a clear trading plan of the EUR/GBP on current market conditions including entry / exit and target objectives, potential profit objectives and probable loss, exposure and time table.  

FORECAST
A spillover of the market trend will continue for next week as the market may only correct since its the last trading day for the week of Feb 19. However, we still favor the EUR/GBP to move higher and may have some legs to continue until it reaches its initial objective from a symmetrical triangular formation signifying a near term trend heading north. As we also maintained our current positions at the 0.8672 long positions and would go for the distance run. Percentage trading has been more favorable as well.

DISCLAIMER:
Although, spread and arbitrary hedging strategies may not guarantee that they may have favorable results at all times ; the strategies do work but the choices and timing are equally important. Poorly executed trades and wrong choices on major pairs and crosses may result to a negative trade or even greater losses in trading the Forex market. So ,please always consult a financial adviser if this would be suitable for your investment portfolio.

This market outlook is intended for informational purposes and not a recommendation to buy or sell and particular currency as trading the Foreign Exchange Market carries a high degree of risk of loss as prices changes from time to time from fundamental and technical factors.

Good Luck and Best in your trading!