Trade Team Update

Well, the market's been pretty quiet the past 24-hours, so I guess we really don't have much to talk about today...

WAIT!

In case you were hibernating, we basically had the EUR/USD make a 500 pip roundtrip between the market's open yesterday and the NY session today...

First, lets re-cap what happened, then we'll look at tomorrow's fundamentals, FOMC, and some possibilities for the euro in the near-term...

As is typical between 5:01 p.m. EST and 5:59 p.m. EST, which is super-low on liquidity, I believe we saw some stop hunting and stoploss triggering yesterday as the market ran up, taking off at 1.5682, only to return back to 1.5682 exactly 90 minutes later...

But not too long after that we got the big news over the wires that the Fed cut interest rates on the discount lending window (not to be confused with the Fed Funds target rate).

That's all the market needed to take us back up to make a string of new all-time highs before topping out at the 1.5900 level... that very violent and exaggerated move we saw last night is what happens when anything related to interest rates are suddenly changed... it is rare for the EUR/USD to make that big of an extended move -- typically, the only thing that will ever cause such a move is a terrorist attack or a change in interest rate policy... so once again we see how critical the matter of interest rates and interest rate policies is to our market...

By mid-morning, the EUR/USD had once again returned back to the point of lift-off which fits right in with it's consistent price patterns...

Now what? First thing we need to do is get through tomorrow in order to paint a clearer picture of the future...

Tomorrow:

In addition to the FOMC, we have a string of key U.S. data release, however, none are as important and critical as what will happen at 1415 EST.

Besides the interest rate policy, the two biggest pieces of data are PPI and Housing Starts...

PPI -- producer/manufacturer inflation data... the market is forecasting a rather sharp decline in producer inflation from last month... I don't believe this at all, but as we saw with CPI, I suppose the number will print to show zero or almost zero inflation in the production sector... based on my research and based on what's happened with commodities during Q1 of this year, we should see a PPI number of between 1.5% and 2.5%.

This will never be revealed as long as the Fed stays in a rate cut cylcle -- you can't admittedly have consumer and producer inflation and cut rates, so we'll surely be lied to again tomorrow.

Housing Starts -- there's been absolutely no visible or viable signs of relief in the new construction sector... construction layoffs continue to persist... new home loans are down, plus with the sharp decline in the employment sector and the overall slowdown with the consumer, there's almost no way we see a USD+ positive print on this one... banks are not lending, consumers are not buying, builders are not building, pretty simple.

Overall, I don't expect any upside USD+ surprises tomorrow on this data...

FOMC:

What's the Fed going to do tomorrow? I have no idea. I don't even really care to be honest... My accounts are ready to take whatever the Fed throws our way...

I've spent the last two weeks preparing my accounts for tomorrow... I've cut euro shorts that were in the negative and have not taken any euro longs at the top of the range... I'm net euro long and I have tight take-profit orders on my highest euro longs and I have tons of free margin to take shorts should we get a surprise tomorrow...

I'm not bragging, just explaining why I have little concern with what the Fed does tomorrow and revealing how I prepare my accounts and protect my margin for rate decision times, especially when there's a lot of unknowns...

Lets take a look at some of the possibilities for tomorrow:

No cut -- this is a no-brainer... if the Fed shocks the markets by holding rates steady at 3.00% we could very well see a violent drop in the EUR/USD tomorrow. A no cut would be the first step in the direction of correction... I have little expection of Bernanke holding rates, he's too much of a manipulative price-fixer to do such a thing, but I'm certainly prepared for a shock of this magnitude.

25bps -- there's probably a better chance of a no cut than there is for a measly 25bps cut... if it were to happen, I think it could initially be USD+ but a cut is a cut and it would just further widen the interest rate differential between the U.S. and Europe...

50bps -- there's a decent probability we see a half point cut tomorrow... if this were to happen we might see some initial volatility but I would imagine the market would just continue on selling dollars and buying euros in the near term...

75bps -- I hate trying to predict these things, but if I had to venture a guess it would be that we get a 75bps cut tomorrow... a good number of economists are forecasting this and most of the market players are expecting this... again, it would just serve to further widen the already lopsided interest rate differential between the dollar and the euro and just give the banks more reason to keep pushing the euro higher in the near-term...

100-125bps -- any cut of 100bps or higher would be a real shock to the markets, I believe, and the result would likely be a violent dollar sell-off acrossed the board. The bond market is clearly begging for this kind of cut, Wall St. wants this kind of cut, and with the Fed lying about the lack of inflation, it would not at all surprise me to see a fat 100bps cut.

If the Fed cut by 100bps tomorrow that would put the Fed Funds target rate at 2.00% vs. the ECB's key lending rate of 4.00%. The 200bps differential between the dollar and the euro could be the final nail in the coffin for the dollar and ultimately send the USD Index into the 60's...

Should the Fed cut more than 100bps tomorrow, we could see a very violent crash of the dollar at which point the only saviour of the dollar would be a tag-team operation between the Fed, ECB, BOE, and BOJ to physically buy dollars...

Thus far all verbal intervention has failed miserably... we got some more verbal intervention today which dropped the euro 80 pips, then it was back to business as usual... somebody will have to cowboy up if they want to see the dollar resurrected from the dead..

I think if the Fed shocks the market with a no cut or a small rate cut, it's entirely possible we saw our top for now at 1.5900... many traders have asked my target for this move we've been on and as I wrote last night I'm looking at anywhere from a 1550 to 1750 pip move from the bottom we made at 1.4380.

1550 pips, bottom to top, would have put us around 1.5930... 1750 pips, bottom to top, would put us around 1.6130. Last night we came within less than 30 pips of my first target of 1.5930...

How I arrive at those targets, based on pip moves, is a combination of fundamental and price action factors, market momentum, overall market sentiment, and interest rate factors...

Now at this point I do not see a clear signal to cause me to close out most of my best euro longs and start adding shorts... I need more confirmation and I believe tomorrow's FOMC will give me a good deal of confirmation for what I'm looking for...

Should the Fed give the market a fat rate cut tomorrow, we'll likely be back on the train to 1.6000 unless somebody blows up the tracks before we get there...