Price Reacts to the Rate Cuts
Overall: After Federal Reserve Chairman Bernanke hinted strongly in a speech yesterday that a rate cut could occur on or before the FOMC meeting scheduled for October 28-29, central banks in the U.S., U.K., Europe, Sweden and Switzerland announced a coordinated 50 basis point rate cut in their policy rates. The Fed also announced a 50 basis point rate cut in its discount window rate to 1.75%.
According to the statement which accompanied the annoucement, the FOMC noted "that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation." The Fed justified the move by saying that "recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability."
In economic news, the National Association of Realtors said that in August, Pending Home Sales on a seasonally adjusted basis rose by 7.4%, the most since October 2001. In the year to August, sales rose 8.8%. All four regions showed monthly gains, with the largest (18.4%) in the West and the smallest (2.3%) in the South. For the year, pending sales fell 2.1% in the South, but the other three regions showed gains. The largest gain was in the West (37.8%) and the smallest was in the Northeast (2.0%).
The Euro (Eur/Usd) moved mostly side-ways in the Asian session but after the London open, the pair jumped more than 100 pips. The pair gained another 100 pips in N.Y. after the coordinated rate cuts were announced. In economic news, German industrial production numbers will be released later this morning but will probably have little effect on the pair.
The Pound (Gbp/Usd) moved within the trading range of the last few days, unable to break significantly in either direction. The pair encountered strong resistance at the 1.7640 area, where it also topped out since the start of the week. The pair experienced downward pressure after some news items suggested the U.K. banking system is facing serious problems. After rising initially on the news of the rate cuts the pair fell in N.Y. and looked to finish below Tuesday's close.
The Aussie (Aud/Usd) fell 260 pips during the overnight session, totaling almost 900 pips lost since the new trading week began. The pair broke below the previous session low and was able to find a bottom at TheLFB S2 (0.6835). The aussie tumbled in the last period as the Australian business cycle seems to have peaked but rose in N.Y. after the rate cuts were announced.
The Cad (Usd/Cad) broke momentarily above the 1.1100 area, but was unable to hold above the resistance level and the TheLFB R1 (1.1095). With this short breakout, the cad reached the highest point since May 2007. The pair continued to rise in N.Y. as crude futures fell.
The Swissy (Usd/Chf) fell 40 pips from the start of the Asian session to trade just above TheLFB S1 (1.1330). The pair also broke below the 1.1400 support during the overnight session. The pair declined in N.Y. after the rate cuts were annlunced.
The Yen (Usd/Yen) broke below the 100.00 level during the overnight session for the second time this year. The pair fell 170 pips to TheLFB S2 (99.80), and moved significantly lower as the European session progressed in response to U.S. equity futures numbers. The pair traded as low as 98.59 in N.Y. as equity markets moved lower after the rate cuts were announced, but was looking to finish the session well off the lows as equities staged a bit of a rally in the afternoon. In economic news, the Economy Watchers Index shows the sentiment regarding the Japanese economy is getting worse from one month to the next. The main reasons cited by the responded are the decline in job offers and the rising prices of house-hold goods and gasoline.
Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com
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