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The US Federal Reserve yesterday upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession. As expected, the Fed kept its target for its federal funds rate set at a range of zero to 0.25%. The previously weakened Dollar had been propping up commodity prices. Following the US Crude Oil Inventory report yesterday, oil prices dropped nearly 4% to below $68.50 a barrel. The Fed statement, which pushed the US Dollar up, only helped extend these decreases in oil prices.

USD – Dollar Optimism High Following Fed Statements

The Dollar rallied yesterday against most of its major counterparts amid concern that the Federal Reserve is nearing the end of its efforts to lift the economy out of recession. The Dollar has been sold-off recently partially due to growing optimism about the outlook for the U.S. economy. The USD finished yesterday’s trading session 100 pips higher against the EUR at the1.4700 level.

The Federal Reserve yesterday upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession. As expected, the Fed kept its target for its federal funds rate set at a range of zero to 0.25%. The Fed repeated that it continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Fed also said it would slow its purchases of mortgage debt to extend that program’s life until the end of March, in a move toward withdrawing the central bank’s extraordinary support for the economy and markets during the contraction. Analysts had expected the move, which smoothes out the purchases.

Looking ahead to today, the most important economic indicators scheduled to be released from the U.S. are the Unemployment Claims and Existing Home Sales at 12:30 GMT and 14:00 GMT respectively. Traders will be paying close attention to today’s announcement as a stronger than expected result may continue to boost the USD in the short-term. Traders are also advised to follow FOMC member Evan’s speech at around 14:30 GMT. This speech is very important as it is likely to impact the Dollar’s volatility. Traders are advised to watch closely, as this is likely to set the pace of the Dollar’s movements going into the rest of the week’s trading.

EUR – EUR Declines as Stock Market Falls

The EUR fell to session lows against the U.S. Dollar yesterday, weighed down by declines in stocks following early gains. This came after the Federal Reserve signaled that interest rates will remain low for some time. By yesterday’s close, the EUR had fallen against the USD, pushing the oft-traded currency pair to 1.4700. The EUR experienced similar behavior against the GBP and closed at 0.9000.

Europe’s manufacturing and service industries expanded for a second month in September, suggesting that the Euro-Zone regional economy is gathering strength and showing signs of emerging from its worst recession in more than six decades after governments stepped up stimulus measures and the European Central Bank (ECB) injected billions of euros into markets.

In addition, European economic confidence rose to a 10-month high in August but rising unemployment is a reason to remain prudent about the economic outlook.

Investors may look for the unusual price volatility to continue in the EUR/USD as the pair attempts to stabilize and find new support and resistance lines. Large price jumps such as these are not common place and present terrific opportunities to take advantage of the price swings for large profitable gains.

JPY – Yen Trading Down against Currency Rivals

The Japanese Yen saw a bearish trading session yesterday, losing ground against most of its currency crosses. The JPY fell against the USD after several days of recovery, while the GBP/JPY cross also rose to around 149.40. The only economic events out of Japan yesterday were the trade balance figures; only slightly changed from forecasts as volatility was kept to a minimum.

Japan’s exports fell in August for an 11th consecutive month as recovery struggled to gain traction in the island economy. Bank of Japan Governor Shirakawa said last week that he is concerned the recovery may not outlast the worldwide stimulus packages that boosted demand for the country’s cars and electronics. The central bank cited exports as the main reason for raising its assessment of the economy last week, as record unemployment and slumping wages weaken consumer spending.

Another headwind for Japanese exporters is an appreciating currency. The yen has gained more than 7% against the Dollar in the past six months, threatening to erode companies’ profits earned abroad.

Crude Oil – Oil Drops as Inventory Rises; Demand Concern?

Oil prices dropped nearly 4% to below $68.50 a barrel during yesterday’s trading session. This drop came after a U.S. government report showed Crude Oil inventories rose more than expected, rekindling worries that energy demand in the world’s biggest consumer will be slow to recover in the wake of the recession.

The International Energy Agency (IEA) said that the inventories rose to 2.8 million barrels in the week September 18, against analysts’ expectations of a 1.5 million barrel decline.

A weak Dollar had been propping up prices recently. The greenback was narrowly mixed against the JPY, EUR and GBP on Wednesday. Oil, like other commodities, is priced in dollars so when the U.S. currency weakens, commodities become cheaper for investors holding other currencies.

As for today, traders should pay attention to the U.S Unemployment Claims report as it has tended to have an impact on Crude Oil’s prices recently, especially in the short-term.

Article Source – USD Up on Fed Statements; Oil Sinks on Demand Concerns

The Euro may see near-term gains as Germany’s IFO Survey shows that business confidence in the Euro Zone’s largest economy rose for the third straight month to hit the highest level since May 2008, but sentiment may not be supportive in the longer term.

Key Overnight Developments

• Japanese Trade Surplus Shrinks on Export Weakness
• Australia’s New Home Sales Matched Record Gain in August
• RBA Says Financial System Resilient But Risks Remain

Critical Levels

The Euro consolidated near the 1.47 level in overnight trading, yielding a flat result ahead of the opening bell in Europe. The British Pound advanced, adding as much as 0.3% against the greenback. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

Japan’s Merchandise Trade Balance surplus narrowed to 185.7 billion yen in August as overseas shrank -36% from the previous year, marking the 11th consecutive contraction. Economists had expected a greater decline, calling for a 157 billion result. Export volumes shrank for the first time since May, with shipments to the European Union leading the way lower. The data may be hinting that the $12 trillion or so in fiscal stimulus spent by the world’s governments to stabilize growth that had boosted demand for Japanese products may be running out of steam. Indeed Bank of Japan chief Maasaki Shirakawa expressed concern that his country’s economic rebound may survive once worldwide expansionary policies are reversed. A stronger currency may have also contributed to the outcome: the Yen strengthened by 1.9% in trade-weighted terms in August, the most since January. While this would typically raise fears that formerly activist Japanese policymakers will intervene into the markets to drive down the currency, incoming DPJ Finance Minister Hirohisa Fujii said last week that it was not the government’s job to set exchange rates and that a stronger Yen had its advantages, clearly signaling that Japanese authorities will stand aside from here. The trade balance is expected to continue to contract in the months, with a survey of economists polled by Bloomberg forecasting that net exports will add on average 2.4% to GDP through this year and in 2010, the least since 2001.

Australia’s Housing Industry Association (HIA) reported that New Home Sales surged 11.4% in August, matching the record-setting monthly gain in January 2008. However, property sales began to rebound in May after the government extended a scheme offering an A$21,000 grant for first-time home buyers, so it still remains suspect whether momentum can remain supported after the flow of stimulus cash dries up. Indeed, unemployment continues to climb, with expectations calling for the jobless rate to approach 8% next year, while the HIA’s own Housing Affordability Index fell for the first time in 15 months in the second quarter.

Separately, the RBA’s semi-annual Financial Stability Review was broadly balanced, saying that although the Australian financial system remains resilient and funding conditions for banks have improved, recent progress can owes significantly to government guarantees on lending and loan losses may still rise in the future. The central bank also cautioned that business borrowing has continued to decline (which spells trouble for employment) and the commercial property market has weakened, contributing to the possibility of renewed problems from bad loans ahead.

Euro Session: What to Expect

Germany’s IFO Survey of business confidence is expected to show that the pessimists about the economy’s six-month economic climate outlook among polled firms outnumbered the optimists by the narrowest margin since May last year, with the Expectations index rising to 96.6 in September. A reading above 100 suggests the majority of respondents were optimistic, and vice versa. While the improvement may engineer some short-term gains for the Euro in the aftermath of the announcement, it remains questionable whether sentiment will remain supportive as the effects of fiscal stimulus both in Germany and abroad that has boosted domestic demand and exports in recent months are exhausted. As it stands, a survey of economists conducted by Bloomberg suggests that the Euro Zone’s largest economy will underperform all of the G10 excluding Japan this year and remain behind the US and commodity bloc countries (Canada, Australia, New Zealand) into 2010. This suggests the ECB will be among the laggards as central banks begin to lift interest rates from current lows, an outcome that bodes well for business climate surveys (for surely businesses prefer lower borrowing costs to higher ones) but will likely weigh on the single currency.

Article Source – Euro in Play with German IFO to Show Business Outlook Rose for Third Month (Euro Open)