special reports

Speculation of 75bp Fed Funds Rate Cut May See Dollar Slide (Euro Open)

Monday, 27 October 2008 01:33:06 GMT  |  Luis Gil, DailyFX.com

Traders continued to see the Euro trade near two-year lows against the U.S. Dollar despite increased sentiment of a 75bp rate cut in the Federal Funds rate. Risk-aversion saw markets gap towards the Japanese Yen over the weekend after U.S. helicopter forces attacked Syrian targets along the nation’s border with Iraq. Foreign exchange intervention dominated the Reserve Bank of Australia’s agenda throughout Monday trading as they sought to purchase their own currency.

Key Overnight Developments

• Increased Odds of a 75bp Fed Funds Rate Cut
• U.S. Choppers Attack Syrian Targets
• Reserve Bank of Australia Intervenes


Critical Levels



Despite a virtual freeze on liquidity, the Euro and Pound remained relatively flat against the Dollar. After gapping down only 28 pips, EURUSD traded upwards to 1.2618 at 21:27 EST. Sterling saw some losses after Friday’s close of 1.5901, trading at 1.5823 at 21:27 EST.


Asia Session Highlights



Japan’s Corporate Service Price index saw a surprising slowdown from previous months. At 0.1% the metric printed much weaker than had been expected. September followed August’s price fall of 0.5% by coming in at 0.4% after energy prices continued to break through new yearly lows.

For a second straight trading day the Reserve Bank of Australia intervened in the currency market as the Australian Dollar traded near five-year lows against it’s American counterpart. By purchasing the Australian Dollar, the central bank artificially props the South Pacific currency in an effort to stave off further declines. Last week saw the currency plummet 9.7% against the greenback and 16% against the Japanese Yen.

Asian trading also saw the odds that the Fed will cut rates by 75bp to 0.75% increase dramatically. On Friday, 92% of traders had bet that the Fed would cut rates down to 1.00% with 8.0% betting on a cut to 1.25%. A shift over the weekend has seen sentiment move towards a more aggressive policy. Today there is a 74% chance of 50bp cut and a 26% probability that the committee will cut to an all-time low of 0.75%.

Geopolitical tensions may have spooked investors as U.S. helicopters attacked Syrian targets along the middle-eastern country’s border with Iraq. Forex markets gapped in favor of the Yen as risk aversion continued to take hold of fear sentiment.


Euro Session: What to Expect



Tomorrow may see the Euro and Pound rally as U.S. equity futures continue to rise. The S&P 500 contract for December traded up 1.98% at 21:24 EST. With Fed Funds futures showing momentum towards a 75bp rate cut, stocks may roar tomorrow. Should these futures gains be realized through actual stock trading, volatility may be dampened. As such, investors might find incentive to invest in riskier assets abroad, causing traders to dump their Dollar holdings.

It looks as though German Business Confidence fell to a five-year low in October as the IFO Business Climate survey is forecast to decline to 91.0 from 92.9 in September. With 7,000 executives surveyed, the IFO institute is expected to show the effects of a lagging economy on the general business landscape. Private consumption in Europe’s largest economy shrank in each of the three quarters succeeding October 2007, with the figure printing at -0.7% in Q3 this year.



To contact Luis regarding this or other articles he has authored, please email him at lgil at fxcm dot com

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars