Trade Team Update

For being the last day of the quarter the market's were relatively quiet. Typically they euro will win the day but this wasn't the case this go around for the end of the quarter...

The euro did make some decent early morning gains as oil made a new all-time high inching its way to almost $144. In addition, we saw Eurozone CPI print hotter than expected at a staggering rate of 4.00%

So the question on the minds of traders is why did the euro drop? Based on what I saw within the price action, and based on past price action patterns I've seen play out under these types of market conditions, today's 100 point correction from top to bottom was purely driven by profit-taking and some stoploss triggering below the 1.5750 level.

Fundamentally, nothing has changed... today was the last day of the quarter which means book squaring is the order of the day. Had it been a "normal" day, the euro would have likely risen to the 1.5850-1.5880 level on the back of that hot CPI data.

That CPI data, which is a full 200bps higher than the ECB's target inflation rate of 2.00% upped the market's odds to 95% of an ECB rate hike of 25bps on Thursday.

I don't base my probabilities on what the market thinks or says, but before this morning's data I was running a 68% probability of an ECB rate hike and based on the data I've upped the probability to 74% of a rate hike.

In addition, ECB's Jean-Claude Junker went on record to tell the market's the ECB is hiking rates on Thursday... he really didn't beat around the bush at all.

Tomorrow:

We get some more big data tomorrow, namely German Retail Sales and ISM. With Chicago PMI printing a touch to the upside there's a decent probability we see a USD+ positive print on the ISM data, and of course the inflation component to ISM should be well to the upside.

To be honest, I don't give a crap about tomorrow's data because all I'm focused on is the ECB and NFP for Thursday.

Sorry if you were looking for some better fundamental analysis for tomorrow but I don't have any to offer. It's the last thing on my mind... my whole focus is on Thursday at this point.

EUR/USD:

Tomorrow's market action will probably be the last bit of volatility we see until Thursday's circus side show... this means if there's any trades you want to get out of to protect your account against Thursday's monumentally high risk, you might want want to act on that.

Many traders have asked what my overall bias is on the EUR/USD... still bearish on the euro. I have not changed my bearish euro views at all even though we've scratched and clawed our way back to test the 1.5800 level.

As you know from reading the updates 1.5800 was a level I was targetng and expecting us to reach before Thursday. And I still believe we'll test that level again before Thursday...

That 1.5820-1.5840 level is absolutely critical... the bull vs. bear battled waged heavy this morning as the bulls were trying to push it high and get through 1.5840, but they lost and were beat back after the profit-taking kicked into high gear.

A test of at least 1.5800-1.5820 should happen within the next 12-20 hours in my opinion. I will likely add a new euro short on the next move above 1.5800 and I'll do this even in the face of a pending ECB rate hike.

First of all, there's no guarantees of a hike and even if the ECB does hike, there's no guarantee it will be a ful 25bps hike... it could be some crazy number... who knows...

Oh, the other question I keep getting asked is why I'm so bearish on the euro... it's for the same reasons I've been explaining all year: fundamentals. Fundamentally, the euro is over valued and there is no economic or fundamental justification for the euro to be trading at these levels.

Of course we know exactly why it's up here but there's no fundamental basis for this. The economic situation in Europe is quite bad and will only detiorate as the year drags on.

The ECB cannot cover up these fundamental issues for too much longer... they've done a good smoke and mirrors job due to their absymal inflation situation, but just as we've seen happen in the U.S., you can only sweep so much dirt under the rug for so long...

The ECB should probably be considering a 50bps cut but this won't happen at least until the fourth quarter or sometime early next year. If the ECB hikes on Thursday this should give the euro a temporary boost but it won't likely take us to astronomical levels.

I'll be shorting the rises... this is my game plan and I'm not changing it at all. There's a correction that's looming on the horizon and I'll keep positioning myself to profit handsomely from this correction that should be comign sooner than later.

Overall, as long as we maintain an upside break of the 1.5750 level we should be able to test at least 1.5790 or better.

If we do get a clean break of the 1.5800 level watch the price action very closely and look for signs of diminished upside momentum and for the market's inability to push through the 1.5840 level.

As I mentioned yesterday, keep an eye on the USD Index. 72 is a key support level. Should the ECB rock the markets on Thursday and the USD Index tests the 70 level and then breaks below, the USD Index will be trading in a "heads will roll" zone. On the upside, keep an eye on the 74/75 level as they've been pretty solid resistance.

That's all for now... I do expect some heightened volatility tomorrow, so be smart with your trades and don't overleverage. If you want to square up and flatten out your account before Thursday's big risk events you may want to get a game plan together for how to do this should we get some good up and down movements over the next 24-hours.

EUR/USD Weekly Outlook 6/29 thru 7/4 2008

I’m searching for words to describe the risk potentials this week holds but I don’t think I can come up with anything strong enough and alarming enough to underscore how critical this week is.

This week’s risk level: 10

What is at stake this week is fundamental data and central bank monetary policy potentially setting the near-term trend of the EUR/USD. This will be a make or break week for the euro or the dollar. All the power is in Trichet’s hands. Trichet holds the destiny of the EUR/USD and he will decide which direction the EUR/USD moves in the near-term.

All markets are 100% focused on the Fed, the ECB, Bernanke, Trichet, and interest rate policy. The Fed and ECB have been toying with the markets the past month. Bernanke and Trichet have been dueling with words and rhetoric to either support or debase their respective currencies.

A month ago Trichet told the markets he was raising rates 25bps on July 3. Shortly after, Bernanke fooled the markets into thinking he was an inflation fighting super hero and that his Fed was going to raise rates at the end of summer. Next, Trichet started to diminish market expectations of an ECB rate hike in July. Then, Bernanke flip flopped and changed his tune on inflation and on interest rate policy. The end result of the Fed and ECB games was the euro closing last week a stone’s throw from 1.5800.

During the past month’s pissing match between Bernanke and Trichet we saw gold and oil make renewed topside gains, we saw the yields on the 2-year and 10-year top out and head lower, we saw Fed Funds Futures diminish their probabilities of Fed rate hikes, we saw U.S. equities take beat down after beat down. We saw more credit and money market issues emerge. We got more lies from the Fed about inflation

Now, this week, we can forget about everything we’ve seen and heard the past month. It’s up to Trichet to decide the fate of the EUR/USD. It’s really simple – the markets are expecting a 25bps rate hike from the ECB on Thursday and their expecting to hear a hawkish Trichet at his press conference.

If Trichet makes good on his promise and raises rates 25bps I fully expect the EUR/USD to test the 1.6000 level or better in the near-term. Should Trichet fail to deliver on his promise of a 25bps and make no change to the ECB’s key lending rate I fully expect the market to sell off the euro and we should see a return test of the 1.5300 level or better in the near-term. It’s really that simple.

That being said, I do not want to discount or diminish the importance of this week’s fundamental data because it will move the market before we get Thursday’s ECB circus side show. We have tremendously critical economic and fundamental data this week… all week long… inflation, manufacturing, production, growth, employment, and consumer data for the U.S. and Eurozone will be released this week – all rate sensitive data.

Tomorrow:

We get things kicked off right away with CPI data out of the Eurozone. Expectations are running high for a hot print on this number. Should we see a hot print or even an expected print you can be sure the market’s will hold to their opinion that Trichet is raising rates on Thursday and this will be a good catalyst to see more euro gains early in the week.

I don’t see any reason why the CPI data should print cool. There’s no evidence of this. Be warned, should this CPI number surprise to the upside and print at 4.00% it’s very probable we’ll see a strong upside move in the euro on Monday.

The other big fundamental event on Monday is the Chicago PMI data. I’m not forecasting a USD+ print on this data. Should Chicago PMI print at or below expectations this will get the market thinking that the more important ISM data will print to the downside on Tuesday and will further fuel any losses the dollar is receiving at the hands of the euro.

NFP:

If an ECB rate decision and Trichet press conference wasn’t enough we also get NFP on Thursday, plus the newest unemployment data. At this early point in the week the forecasts for NFP are all over the place. Economists are forecasting anywhere from -43K to -60K. Some are forecasting upward revisions to last month’s data while others are forecasting downward revisions.

My thinking is this… if the ECB raises rates or if they shock the markets and don’t raise rates, NFP will likely take a backseat to the ECB no matter what. Now, should the ECB not hike rates and we get USD+ NFP data, hang on to your seats because it will be a wild ride…

EUR/USD:

There is substantial risk to both the EUR and the USD this week. At the beginning of the week all the risk is clearly on the USD. I strongly urge against adding new EUR/USD shorts. Adding new EUR/USD shorts is not at all in my game plan at the beginning of the trade week. There is too much risk on the dollar to try and buy it up.

It is imperative that we closely track and follow the market correlated variables in addition to the fundamental data, the Fed, and the ECB. Last week ended with the Dow getting pounded into the ground, with oil making new all-time highs, with gold making a renewed push north, and with bond yields dropping off their best USD+ levels.

All market correlated variables are working against the dollar and working for the euro at the present. Price action remains clear to the upside. This week’s fundamentals favor strong gains in the euro and more losses for the dollar. As I said, the fate of the EUR/USD is in Trichet’s hands at this point…

I told you last Sunday that gold would come back into play and this surely was the reality. We hadn’t heard much from gold but it came back with a vengeance in last week’s trading. Guess what’s going to come into play this week? The good old USD Index…

The past two weeks the USD Index has been relatively quiet and rangy. One main reason the USD Index has somehow stayed fairly USD supportive is because the yen and the swiss haven’t made substantial gains against the dollar the past two weeks. This could all change. The euro carries the most weight on the USD Index but should we see the pound, the yen, and the swiss all move against the dollar along with the euro this will push the USD Index lower and just cause the dollar to extend its losses to a greater degree.

Should we break below the 72 level on the USD Index this could potentially signal a test of the key 70/68 level. Should the ECB fail to deliver a rate hike and should the market correlated variables turn around in favor of the dollar, we could see a test of the key 74/75 resistance levels. Keep an eye on the USD Index this week please…

Trading and Risk:

I’m begging all traders to establish their risk and money management plan for how they are going to handle the potential chaos… establish your risk and money management plan now! When will you trade? When will you not trade? What size entries will you make? What will you do if the ECB doesn’t raise rates? What if they do raise rates?

What if there are U.S. bank failures this week? What if there’s a surprise geo-political event this week? Think about these things… consider these factors… think about the risks, the probabilities, and the potentials.

If your risk appetite cannot handle the potential volatility, sit on the sidelines. If you’re an emotional train wreck this week will could send you over the edge. For me, I love this chaos, I love the insanity. I feed off it and thrive off it. The more chaotic the market is the more sense it makes to me, but not all traders are this way, and that’s fine, but you have to trade under the conditions that best suit you.

As far as trading goes, I’m looking at much higher probabilities of euro gains early in the week. Adding new EUR/USD shorts is certainly not in my game plan at the start of the week. I’m holding open all euro swing longs I have at 1.4595 on up until further notice.

You know the potentials this week holds, you know the risk this week holds. Be smart, don’t over leverage, and don’t make knee-jerk and emotional trades.

Trade Team Update

FOMC:

I really don't have much to say about the FOMC... rates were held steady as forecasted. The actual statement was a piece of trash. It said nothing about anything... the talking heads will coin it as a "balanced statement between downsides to growth and upsides to inflation..." Whatever.

The statement has not given the market anything to really work with. Bernanke said inflation was an eminent risk but should moderate over time. My opinion is that the Fed did not give the market any real reason to believe the Fed is seriously going to hike rates in the Fall.

It is important to note that Dallas Fed Fisher wanted to hike rates... he's my new Fed hero. If I could crack the Fed's skulls with a Louisville Slugger I'd probably only give Fisher a love tap... that's how much respect I gained for him today!

Bottomline -- I don't see this statement doing much to help the USD in the short-term...

EUR/USD:

We do have some dollar fundamentals tomorrow but I believe any moves we see will be based on the FOMC statement... remember, Frankfurt and London were already closed by the time the FOMC was released...

Tomorrow's dollar data shouldn't really do much to give the dollar a boost. It's possible Existing Home Sales prints with a slight upside surprise but I'm not placing bets on it.

As I indicated, I shorted the euro on the rise up today and will gladly hold on a swing basis. Fundamentally, all eyes will now be on Trichet... we got through the FOMC and now it's Trichet's turn to either put up or shut up.

He did indicate the ECB was not going into a rate hike cycle but this is not even really news, nobody was expecting them to. We get one more Trichet speech this week, so watch out for that.

I'm still holding euro longs and I believe we can test the 1.5720-1.5750 level next should the market sustain above the 1.5640 level and we see renewed momentum to give us an upward push.

After this afternoon's sharp rise up towards the 1.5700 level we're likely due for a bit of downside correction. Weak euro longs will be placing stops at and below the 1.5640 level and we could easily see the banks and brokers want to take out those stops before renewing a topside move.

Be warned the market is even more confused after today's FOMC... this could mean more ranging, more illogical moves, and more shenanigans until at least the ECB's next rate decision in July.

The euro is poised to make more upside gains but of course this will be left for the market to decide...

Trade Team Update - - 6/24/08 (FOMC)

Before we do a full breakdown of tomorrow's FOMC, lets first do a quick re-cap of today's market action...

The major fundamentals printed exactly as we forecasted yesterday in addition to the EUR/USD making a top right to the pip at my 1.5621 key upside level before falling back to the 1.5560 level after NY closed.

I would like to briefly re-cap the Consumer Confidence data -- it was abysmal. I forecasted a downside print but I honestly did not expect it to come in this low. It printed right near 50 which is dangerously low. It was the worst print in 16 years and it shows a very accurate representation of the U.S. consumer.

The consumer makes up a considerable chunk of GDP and GDP is a considerable factor in Fed monetary policy. I think it's quite possible today's abysmal consumer data might have taken some of the wind out of the Fed sails as far as being wildly over-the-top hawkish in their statement tomorrow.

On Sunday I told you to watch bonds and gold very closely... the bond market is now having second thoughts about how hawkish the Fed is going to be on rates. This is certainly something to take note of.

Gold has been tracking very closely with the euro this week as I indicated it would before the market even opened on Sunday. Reason being -- gold is tightly correlated to inflation and inflation-based monetary policy, as well as being tightly correlated to the movements of the USD.

FOMC:

Tomorrow's FOMC is going to be the most important event the market will go through so far this year. The results of tomorrow's FOMC, in my opinion, will set the EUR/USD on a short-term trend -- at least until the next ECB rate decision and Trichet press conference.

Throughout the week many traders asked me to offer my own personal probabilities for what may happen tomorrow and for me to lay out the possibilities. I am happy to do this.

But before we even get into that, I must talk about risk and money management. I am encouraging all traders to treat tomorrow's FOMC like an NFP. This means stay out... there are too many unknowns and too many possibilities for you to even think about trying to position yourself for what may or may not happen.

The risk is too high and most traders don't have the skills or the emotional strength to quickly navigate through the potentially volatile price action and wild price swings.

If you're usable margin heading into the FOMC is below 82%, I'd say you're in the danger zone and need to take immediate action to protect your account and protect your original account value. If you're in an overleveraged situation fix it now. You know what is at stake, so please be smart about it.

OK, the following FOMC commentary is based on my own analysis, my own opinions, my own probabilities, and my own view of the market. Traders asked for this, so I'm happy to oblige.

No rate cut/no rate hike: Over six weeks ago I told you the Fed was done cutting rates and this is my call for tomorrow as far as the rate decision is concerned. I'm currently running an 85% probability that the Fed will hold rates at 2.00% tomorrow (i.e. no hike, no cut).

My reasons for believing the Fed is going to hold rates is because the credit market is still on very shaky ground. The financial/money markets are under pressure and we've not seen all the light at the end of the tunnel in this regard. In addition, the housing market has yet to find a bottom and a rate hike at this point would send the housing market to their worst levels ever.

Next, I look at the equities market. The equities market thrives on low rates and cheap money. We know the Fed has a special place in their heart for Wall St. and I don't believe they are going to do anything to shake up Wall St. tomorrow.

Next, I look at growth, the current account, and the trade balance. All three of those fundamental sectors remain very weak to the downside. Rate hikes would put a stranglehold on growth. Rate hikes would strengthen the USD which would put our already attrocious current account and trade balance under more downside pressure.

Next, I look at the jobs market. Rate hikes make the cost of money and credit more expensive. The U.S. jobs market is still considerably weak to the downside. The employment sector has been bleeding jobs all year long and initial claims have been steadily rising. A rate hike would put the employment sector under further downside pressure and I don't see the Fed doing this yet.

25bps raise: My current probabilities show a 10% chance of a 25bps rate hike tomorrow. The only reason Bernanke would raise rates tomorrow would be to send a message to the world markets that the Fed is serious about saving the USD, serious about inflation pressures, and to slow down the commodities market.

As a taxpaying American citizen it's my opinion that a rate hike would be the greatest thing ever. In fact it's imperative the Fed starts raising rates. It won't happen tomorrow but I truly hope it happens before the end of this year. I'm seeing too many friends and family suffer under the crushing weight of inflation. I'm seeing hardworking folks lose businesses and lose their dreams of entrepenurship. This ought not to be happening in America.

But, this is exactly what happens when you have an illegally formed and unconstitutionally operating central bank that is manipulating and price fixing markets.

25bps cut: My current probabilities only show a 5% chance of seeing a 25bps cut tomorrow. The Fed is under too much pressure to save the dollar and cool commodities to cut rates any more. The fact that they've acknowledged the inflation issue was a sure fire signal that rate cuts are off the table until further notice.

Those are my current probabilties based on current market conditions and on my own fundamental research of tomorrow's FOMC. I don't anticipate making any changes unless of course I see something in the market, otherwise, this is my thought process heading into the FOMC.

EUR/USD:

Should the Fed hold rates at 2.00%, the actual rate decision will take a backseat to the FOMC statement. If the market doesn't get an upside or downside shock with the rate policy, all eyes and all attention and all focus will be on the FOMC statement.

It is within the FOMC statement that the potential volatility lies and the potential for wild and chaotic price swings lie. The statement is the key to where the market is going to take the EUR/USD in the near-term.

I cannot predict what the FOMC statement will say. I can't and won't speculate on this. I can make the case for the Fed being dovish in their statement as easily as I can make the case for the Fed being wildly hawkish in their statement.

But I will say this -- it is my opinion that the risk that lies within the FOMC statement is on the EUR and not on the USD.

A few weeks ago Bernanke made one hint at raising rates and the euro lost 500 points the dollar. That's a 500 point move based on one comment during a speech.

I do believe the Fed talks about inflation in the statement. What I don't know and can't predict is how strong the rhetoric is going to be -- and this is the real risk for the euro tomorrow.

Should the FOMC statement place special and strong focus on rising inflation and if the statement gives any kind of signal for an upcoming Fed rate hike it is my opinion that the EUR/USD will make a rather sharp downside correction. This could mean a move to the 1.5200 level in the short-term.

On the flip-side, should the FOMC not give special attention to the inflation issue and if it fails to give any signal to the markets that the Fed is considering a rate hike, all bets are off for the dollar and we should see the market attempt to move the EUR/USD back to the 1.5750-1.5800 level in the short-term.

The other factor to consider is how the actual rate decision vote comes out. If all FOMC members vote for either a no-cut or a few vote for a cut this will not be much of a confidence boost for the USD. If a few members vote for a hike, this will likely be perceived as a signal of coming rate hikes and would be very positive for the USD.

Trading:

I'll warn you again -- stay out until at least after he FOMC and the dust settles. Don't trade anymore between now and then. Protect your margin. Protect your principle. Protect your money. Be smart, don't be an idiot. You can't fight this market, you can't fight the banks, you can't fight the brokers, you can fight the stop hunting and stoploss triggering that will go down the next 24+ hours.

For now my trade plan is to keep shorting the euro on the rises. I'm still overall bearish on the euro. Tomorrow's FOMC could alter my near-term gameplan but for now it's remaining the same.

Now don't be surprised to see some movement in later Asia and early European session. There could be more positioning and squaring that goes on as the market continues to prep for the FOMC.

Last warning -- sit on the sidelines and watch the chaos. Don't be an idiot and don't try to be a cowboy. You could pay dearly for being an undisciplined risk manager.

Trade Team Update

Before we begin I'd like to suggest you read yesterday's update if you haven't done so

Well, it didn't take long for the first round of shenanigans to happen this week as we saw the euro make a sharp 160 point correction from top to bottom. In addition, gold took a beating and at one point was down 2% which is quite significant.

In fact, the drop gold made during the NY session was unlike anything I'd ever witnessed gold do in the past. This kept the downside pressure on the euro until after London's close and we've since made a nice recovery up above the 1.5500 level.

The meeting with the Arabic oil ministers didn't produce much fanfare... they said a lot of things and what it boils down to is a production increase of 200,000 barrells, which really isn't much to get excited about. The oil market certainly didn't bring down the price of crude on this news.

Fundamentally the news was pretty bad out of Europe, showing further signs of weakening growth, which we knew was going to happen mid-year, so this is not coming as any surprise.

The German IFO data was particularly weak and shows more of a bleak outlook for the German manufacturing, production, and consumer sectors. This can easily translate into lower than expected GDP and hint towards the ECB having their hands tied as far as raising rates in July.

Tomorrow:

It would be nice if we didn't have mega fundamental data before the FOMC but that's just not the case this go around, so we need to prepare accordingly...

First thing tomorrow morning we get German Consumer Confidence and French Consumer Spending... I believe we'll see a print at or below expectations on the German data. For the French consumer data, I can't be as bullish on those numbers as the market is expecting.

But, for tomorrow, my focuse is clearly on the S&P/Case-Shiller data and Consumer Confidence -- this data will carry more significance than the data coming out of Europe. Based on my research it's hard for me to forecast either one of these reports to print USD+.

Once gas at the pump broke the key $4.00 a gallon level my research shows the consumer has pulled back even further the past few weeks. In addition, I've been doing what I call "field recon" the past four weeks.

Now, this kind of "field recon" wasn't much work at all... it basically consisted of me and my friends hitting the local watering holes, music venues, restaurants, coffee shops, and even the tourist traps in downtown Nashville.

I'm a very social person, so it was fun to do this research but I did find some rather shocking trends the past month. I noticed a sharp and drastic decline in patrons at the local pubs, music venues, and restaurants. I'm talking about a very noticible drop.

I talked to many servers, bartenders, bar backs, and managers to confirm what I was seeing. They all confirmed that business was down anywhere from 30% to as high as 70% in some cases.

I have a friend who serves at a nice restaurant frequented by a lot of celebrities when they come to Nashville in addition to it being popular with the locals. She told me she'd typically make about $300 a night in tips and now she's getting about $200 a night in tips.

I saw places that were normally filled wall-to-wall on a Friday and Saturday night mostly empty. It was really sad actually. Nashville has been largely immune from the economic downturn but apparently it's even hit the once resilient city of Nashville.

I recently talked to a friend who went to Vegas and she reported seeing business way down compared to even a few months ago. Hotels are running killer deals to get people to come out.

Now normally under recessionary conditions we'll see a rise in consumer spending for entertainment, but this is not the case and that shows me the consumer is still on life-support.

If you're serious about trading the FX market I highly encourage you to do your own "field recon" any time you're out shopping, at the movies, at a restaurant, local pub, etc. Talk to the managers, talk to the wait staff, talk to everybody... get the inside scoop and you'll be well served as a trader to know what's going on with these issues.

EUR/USD:

Obviously the most monumental event doesn't happen until Wednesday but this doesn't mean the market's going to sit around and wait for the FOMC... I believe we'll see some volatility and price swings ahead of the rate decision.

If we see tomorrow's home data and consumer data print weak to the downside I believe we'll start to see traders hedge against their USD short positions and this could mean buying the euro, which would drive the euro back up to the top of the range. There's a decent probability we see this happen in the run up to the FOMC.

So that means for now I'm holding all euro longs. I told you six+ weeks ago the Fed was done cutting rates. I still believe the Fed is done cutting rates. The Fed will not raise rates on Wednesday either. The key is the statement of course.

And I want to give you a heads-up... there's no way I can predict or even speculate on what the FOMC statement will say, but my probabilities are showing it could be perceived as USD+. This means I'm willing to take losses on any open euro longs if I have to and cover those losses with euro shorts -- it might be a gametime decision, but I'm already predisposed to do this if I have to.

I do have some key levels to offer:

Key upside levels:

1.5534
1.5558
1.5572
1.5598
1.5621

Key downside levels:

1.5501
1.5483
1.5462
1.5440
1.5411

My trade plan still calls to add euro shorts on the rises -- I'm not changing this at all. I told you weeks ago I was bearish on the euro overall and I'm still bearish on the euro overall...

Of course it's imperative we keep a close eye on oil and especially gold. I told you in yesterdays update gold would likely come back into play as a strong market correlated variable and we saw this play out in today's trading, so watch it close.

Also watch the bond market as we draw close to the FOMC... if those yields keep dropping this means expectations of a rate hike or strong hawkish rhetoric is easing.

Be smart -- don't overleverage -- don't get into a trade you can't get out of or aren't willing to take a loss on ahead of the FOMC... if the market doesn't suit your risk appetite based on upcoming events, sit it out and watch from the sidelines.

EUR/USD Weekly Outlook 6/22 thru 6/27 2008

TRADERS:

It is imperative you realize this week carries a risk level of 10.

What does this mean and why? At the beginning of each week, based on what fundamentals are on the books for the week, I give the trade week a risk rating. This week's risk rating is a 10 out 10.

The reason this week is rated 10 is because we not only have an FOMC rate decision and rate policy statement, we have two speeches by Trichet, we have major consumer data for the EUR and USD. We have major housing data for the USD. We have key inflation data for the EUR and USD, and we have a market that is not behaving rationally but is making emotional, knee-jerk decisions that defy logic and lack any kind of common-sense.

Those ingredients make for the highest risk rating I can possibly give. Expect heightened volatility, wild price swings, and possible surprising price moves at unexpected times.

Plus, be on alert for whatever kind of news come out of the meeting with Arabic oil ministers. If they come out with a strong statement to crank up more production and put more barrells of crude into the world supply, I would suspect this would hurt oil and help the dollar...

Trade Plan:

There is so much risk ahead for this week that I'm going to start today's update by encouraging you to sit down tonight, clear your mind, and write down your risk mangement plan and trade plan for this week.

How do you do this?

First, study the calendar... study what's on the books for this week. Look at when the big events are happening. Think about all the possibilities that could happen if the Fed comes out hawkish, or if they come out dovish. What if Trichet turns dovish on raising rates in July?

What if Core Durables, Consumer Confidence, and the Michigan Sentiment all suprise to the upside? What if German CPI prints to the downside?

Then, you connect the dots back to how all those individual pieces of data could directly effect Fed and ECB rate policy. This week is all about fundamentals, economics, and most of all: interest rates.

Please don't be lazy and skip this process of coming up with a game plan for the week ahead. If you've never done anything like this, now is a great time to get disciplined.

Of course I will provide analysis and forecasting in the daily updates, but don't trust what I say -- those are my opinions based on the information I collect and gather. I don't always get it right -- I may get some of it wrong this week. That's why you need to do your own research and come up with your own game plan to manage your money.

And as you're formulating your game plan, think about what you're going to do if the worst case-scenario happens -- getting caught long at a top or getting caught short at a bottom.

What size are your entries going to be? How far are you going to space out your entries? Will you use a mental stoploss should the market move against you? Think about these issues... you need to step up your game this week.

Rates and Yields:

Obviously the biggest event is the FOMC. For the past three weeks the market has been making knee-jerk reactions based on interest rate speculation.

Right now Fed Funds Futures is predicting a 50bps rate hike as early as October. The 2-year yield has started to move above the Fed Funds Rate. This means the bond market is signaling that the Fed is definitely done cutting rates and is likely to move into a rate hike cycle sooner than later.

Yeah I don't think so...

But, it doesn't matter what I think, it matters what the market thinks. If you're serious about following monetary policy and rate policy like I am, do yourself a favor and watch the yield on the 2-year. If the yield keeps going up this will give you a great indicator that the market is thinking the Fed is hiking rates... and you know what that will do for the USD.

Also, watch the yield on the German Bund. If the yield spreads between Bunds and Bonds go up in favor of the Bund this will be better for the EUR vs. the USD. You don't have to watch them tick up and down in real-time, just glance at the yield every so often to keep up with where they're moving.

I think gold will come more into play this week than it has the past two weeks. All eyes must still be kept on oil, of course.

Tomorrow:

The biggest event tomorrow is the German IFO data which carries similiar significance to the ZEW data, but deals with various sectors like retail, wholesale, manufacturing, etc. I believe we could get some downside on this data. The forward looking outlook for growth, manufacturing, production, and the consumer is still weak to the upside in my opinion.

A downside print on the IFO data certainly carries a higher potential to bring the EUR/USD down.

We have zero USD news tomorrow. We do not have any Fed speeches this week other than the Fed activities on Wednesday.

EUR/USD:

Keep in mind we may see some big market players position themselves ahead of the FOMC. This is where those volatile price swings that I mentioned earlier will come into play. If a bank or hedge fund wants to get positioned prior to the FOMC they very well could use an ill-liquid time to perform these actions, so be prepared for that please.

Last week I called a 1.5640 topside by Friday and we were fortunate to see that play out as forecasted. Now that was great but the euro's gone back to sitting in a precarious spot -- the 1.5600 level.

We knew the euro was under value trading below 1.5600 but now could it be getting to close to an unattractive value? It's possible. So for me, this means I'm not likely to jump right in with a new long position.

My trading in the market will stay considerably scaled back at least until Wednesday. My entry size will be small and I won't be trying to hit a home run on a trade, but to make safe profits with minimal risk exposure.

Based on Friday's real-time price action I do believe we have the potential for more topside testing, but this will be dependant upon that upside momentum can sustain Sunday/Monday. And it will also depend on any geo-political events that might go down at the start of the week.

For example, suppose the Arabic oil ministers promise to raise production and then some oil cowboys hijack a platform, or cut a pipeline, etc. That would obviously send the crude market into a tailspin... so, this is the kind of stuff you have to be ready to deal with this week.

My trade plan for this week will be to add EUR/USD short positions on every 150-200 pip rise, unless the market tells me to do otherwise, this is my plan. I will still hold my best euro longs, but I'm definitely positioning my accounts with swing shorts on any rise up.

If the upside momentum ceases to exist and commodities do some correcting we could easily see a move back below the 1.5500 level. Should the markets cooperate and work together to devalue the dollar, I see no reason we can't push towards the 1.5750 level to test resistance and try to trigger stops.

And speaking of stops, this week the banks and brokers are going to be running stops and triggering stoplosses. This is their pattern during weeks like this. I know what they do and I'm not expecting anything differently from them this week.

OK, I think you understand what you're up against this week and how important it is for you to stay at the top of your game, not to overleverage your account, and not to take any dumb, knee-jerk trades.

Be smart, be patient

Trade Team Update

If you were like me and expecting to see 1.5600 today, you can thank the Brits for taking that off the table...

I'm going to explain what happened to the euro today... it's more of a rare and uncommon occurance, but it happens, I've seen it happen at least twice in the past, and today makes the third time I've witnessed this...

This morning UK retail sales clocked in at a record 3.5% month-over-month gain which was the highest since 1986. So, the market gets a major upside shock and of course this sends the cable up against the dollar, naturally. At the same time it sent the cable up against the euro, naturally.

This fundamental shock also sent the dollar up against the euro... this is why we dropped back to test the key 1.5460 level again today and our march to 1.5600 was stopped dead in its tracks.

How can this happen? It's a purely knee-jerk move that is directly connected to monetary policy, specifically interest rate policy. Here's how this whole thing works...

The Fed and BOE are very similar as far as monetary policy is concerned... they are like the two evil twin brothers of central banks. The relationship between the Fed and BOE are not at all like the relationship between the Fed and ECB. Afterall, the BOE had a major role in establishing the Fed, so you can see the obviously close link here.

Basically, the market saw this hot retail number and speculated on the BOE raising interest rates and this sent the cable soaring. This also got the market thinking along the same lines for the Fed... so, we get euro profit-taking, short positioning, stoploss triggering, and a 120 pip drop.

Now this doesn't mean you need to watch every UK news release if you're a EUR/USD trader... I'm just explaining what happened today and that while it's more of a rare occurance it can happen nonetheless.

It also didn't help that oil was weak to the downside and that gold sputtered out after making a decent move up. Fundamentally the news was bad for the dollar today as we forecasted.

Chief Liar Paulson came out with guns blazing to promote more government regulations, more Fed oversight, blah blah blah... basically he wants to give more powers to central bankers to manipulate and price-fix the markets. Sounds like a wonderful idea to me...

Tomorrow:

The only piece of data is German PPI which should print EUR+ based on the continuing strength of commodities. The most important event is a speech by Trichet. I do not have information telling me he's specifically scheduled to speak on monetary policy but I would expect him to say something about price stability, rate policy, etc. I do not believe we'll hear anything damaging to the euro, but these things cannot be predicted and speculated on, so be ready for the unexpected.

EUR/USD:

As far as the euro is concerned, I don't care what happened today. In fact, this move down just gave me another buying opportunity to get in at a better entry. This latest move is not shaking me out...

I am still euro long in the short-term, euro bearish overall, and still expecting to see my 1.5640 target hit. Sure it might not happen tomorrow, but I'm not taking it off the table until the price action and the underlying fundamentals of the market show me otherwise.

I took profits on my 1.5521 short this morning and will likely short the next rise up. I'm holding all euro longs open at this point.

The 1.5460 area is a very important key level spot. It's proven to be solid support after being tested and rejected several times this week. Now, it is imperative this level does not sustain a break in order for us to regain some topside momentum.

I would like to see the euro move above the 1.5520 level as we get into the Tokyo session. I posted some key levels after Wall St. opened this morning and these levels have not changed under present market conditions.

The first upside level of 1.5514 was hit to the pip twice and rejected twice sending us back down below the 1.5500 level. So for now these are our key levels to watch out for:

1.5514
1.5527
1.5544
1.5561
1.5582

Key downside levels:

1.5488
1.5458
1.5444
1.5421
1.5404

It's important to note that we'll be wrapping up this week and heading into next week with a mega FOMC on the horizon... if this event does not fit well with your personal risk appetite, don't trade tomorrow and get your account flat as we close out the week... don't take any new trades tomorrow and just sit on the sidelines.

As always, please practice strict risk and money management disciplines under these market conditions.

Trade Team Update

Boooooringggggg...

Yeah today sucked in the market, but that's OK with me because I think we're just getting things squared away to make a more extended move.

There was no fundamental data which was the main reason all markets were quiet. Shhh... don't tell this to a tech trader, but I guess news and data does move markets...

Tomorrow:

Tomorrow is light on euro news, but we do have the Philly Fed Index, an important Initial Claims report, and an appearance from Fed Kohn who will testify in front of a do-nothing Senate committee...

Kohn is not specifically scheduled to speak on monetary policy but I would suspect he gets questioned on current economic conditions and conditions with the inflation issue, so keep a close eye out for that.

My forecast for the Philly Fed Index is that it will remain weak and to the downside. I'm not expecting any USD+ surprises here. An Initial Claims report that comes in at or below market expectations will only further serve to keep the dollar pressured against the euro.

We will hear from Chief Liar Hank Paulson... he's scheduled to lie about the economy and it's doubtful anybody will listen nor care what he has to say....

EUR/USD:

I'm still overall bearish on the euro and my game plan is to add euro shorts on every 150-200 pip rise. My newest euro short was taken at 1.5525 and I have a short at 1.5341 currently open. I don't even care about drawdowns on those shorts due to my overall bearish stance on the euro. If the 1.5525 goes into profit I may close and re-short higher, but for now it will remain a swing short.

The idea here is to build swing short positions as we move back up to the top of the range... and this technique and trade concept goes back to what I've been talking about with building buffer and building positions that will eventually feed me positive equity and usable margin...

Be smart and manage your margin properly... and be patient... wait for your trade, wait for your price, and use proper risk management.

Trade Team Update

As we indicted in yesterday's update, the likely scenario with today's fundamentals would put the market in stand-still mode as the data would be mixed USD+ and USD-. That's exactly how it played out today.

Oil was weak to the downside, gold had a so-so day but once again the fundamentals of the market were the key...

German ZEW printed weak but this just gave us a great shorting opportunity and then a buying opportunity -- many reported playing both sides of this move and that's a job well done...

As I expected, PPI printed strong to the upside while the Current Account printed below expectations along with Industrial Production. Now, the fundamentals of the past two days are playing directly into the main factor that cost the euro 500 points last week -- Fed rate policy.

Apparently some traders didn't think I was clear enough in my last 5-7 posts, so let me be clear now: if you think the Fed is hiking rates in September you are an idiot. Bottomline. End of story. I hope I've made my point.

Yes, the Fed needs to be hiking rates. In fact, Fed Funds should be sitting around 7% right now to fight off this inflation. But it's not going to happen. Today's fundamentals prove it's not going to happen... growth, housing, and the consumer is still way to the downside.

Hiking rates now would crumble any gains growth might see through the rest of the year. It will debilitate the equities market, it would crush the housing market, and it would send the U.S. into political turmoil.

Between the Fed and ECB the only one of the two that carries the highest probability of raising rates is the ECB, not the Fed. Fed Funds Futures finally started to get the clue this week.

So has the bond market. The past two weeks the bond market was screaming for rate hikes ASAP and now they are re-thinking things a bit. And all of this is going to be great for the euro in the short-term once these idiots realize they are idiots for even thinking rate hikes were on the way.

OK, now that we got this issue cleared up, lets take a look at tomorrow...

Tomorrow:

No news tomorrow except for crude inventories. Don't let the lack of news lul you into thinking the market can't and won't move...

EUR/USD:

The pair was quiet today and I really don't have anything monumental to say about it at this point. I am very much remaining euro long right now at least in the short-term...

At this stage I absolutely, positively refuse to close any open euro longs that are sitting in drawdown.

I told you last week that I wasn't going to allow the market to shake me out after that 500 point drop and I'm not changing my stance on this at all until the price action shows me otherwise.

That being said, I see that it is imperative we stay above the 1.5400 level in order to continue our move back up. And if we can stay above 1.5450 a few hours into London there's a very good probability we hit my first upside target of 1.5600-1.5640 this week.

Even though I'm remaining bullish on the euro in the short-term I'm certainly not going crazy with fat euro longs and I will continue to short the rises.

I do have some key levels to offer:

Key upside levels:

1.5524
1.5552
1.5567
1.5584
1.5599

Key downside levels:

1.5501
1.5489
1.5462
1.5441
1.5428

As always, please be smart with your entries and with your leverage.

Building A Buffer -- Risk and Money Management Technique

Building a buffer simply means adding profits to your account to protect your original balance/original account value (principle). For example, suppose you opened your account with $20K. Well, if you added a net gain of $2000 (10% ROI) that would mean you’ve added a buffer of $2000 against your original account value of $20K.

Building a buffer is also valuable as you can use your buffer money as your usable margin money to take trades in the market while continuing to protect your original account value.

There are two important things to focus on with this buffer building concept. The first is a risk management principle that is directly connected to usable margin. For the purpose of this commentary we’re going to use the $20,000 original account value/$2000 of buffer as our example…

Now obviously the first step is actually building the buffer into your account which is done through your trading. During the buffer building phase of managing your account your trading style should be on the conservative side. From this point forward I’m going to explain how this all works based on my own style and the way that I do things and how I was trained to do it. You can take this information and develop your own game plan for how to build a buffer… this is just how I do it and what works best for me.

Building Phase:

I get a brand new $20,000 account – totally fresh, never been traded. The only thing I’m focused on doing from the get go is building a buffer. That is my focus for the account… to protect the original account value with a buffer and then to build a buffer to use as margin.

In the buffer building phase my typical entry size is anywhere from 0.5% to 1% -- very conservative… and I will typically never have more than a total of 3% to 4% of the account’s total usable margin in the market at any one time.

My trading style is by far intraday. I will typically only take low-risk/high-reward trades and use very little margin doing so. I do not want to expose this new account to the higher volatility, higher risk times in the market like during London’s open, or during an NFP, or during any kind of big event with the Fed or ECB. If there’s a higher risk fundamental event happening in the market I will usually keep this new account unexposed to that during the buffer building phase.

My buffer ROI goal is usually no less than 10%. That means I want to lock in 10% profit, so on a $20K account that means I would need to ad $2K in profit to complete the buffer building phase. My trading style and risk management cannot be altered under any circumstances until the buffer is built.

And the goal is to have the account flat once I’ve achieved my buffer building goal. So, I lock in the $2K of profit and the account is flat – I’ve got 100% usable margin to work with and then I’m able to move on to the next phase of using buffer.

Buffer as margin:

As far as the usable margin aspect is concerned, building a buffer of profit is critical because you can utilize your buffer to use as your margin. OK, so now I have $2K in buffer profits and I have all 100% of my margin to work with. I decide that I’m going to use my buffer money as my margin money – this means I’m willing to risk profits in the market and not risk principle – this is the key here.

My risk and trade plan says that I’m going to make a 5% margin entry on my next trade. 5% sounds pretty high doesn’t it? Yes, 5% would be extremely high but I’m basing that 5% entry on my buffer money – I’m only risking profits, not principle.

5% of $2K would be $100. This means on my account with 200:1 leverage I can take a 2 mini lot trade, which takes out $100 liquid cash and pays me $2 per pip.

Now if this trade goes against me my principle is still protected because I’m only risking profits on this trade, not the original account value. And should this trade really go against me and I’m forced to close it for a loss my loss is coming from my profits, not my principle.

If I take a trade using buffer as margin and I’m forced to close that trade for a loss my next job is to re-build that buffer. It’s that simple.

Daily buffer building:

Building a buffer isn’t just something you do with a new account, it’s something you can and should do everyday. There are two ways you can build daily buffer. The first is by opening and closing a trade and locking in those profits to pad your original account value.

For example, suppose you locked in $100 worth of profits on a trade during the Tokyo session. Well, that means that you have $100 you can risk giving back to the market should your next trade(s) go against you and you have to close for a loss. Sure, it sucks giving profits back but at least you didn’t give anymore than the $100 you made on your last trade and it just puts you back to square one…

The other aspect to building daily buffer is to take a trade and keep it open to provide a continual profit source to feed your equity and usable margin. Let me give you a real example of how this works… back on April 22nd the Team called euro shorts between 1.6000 and 1.6014. When we called those I had euro shorts at 1.5992, 1.5996, 1.6004, and 1.6011.

As the market started dropping after it had reached that top, I closed all of those shorts except for one… I left my best euro short open which is the 1.6011 and it’s still open to this day. That killer short at 1.6011 is a perfect buffer trade that is feeding my equity and usable margin with positive cash flow every second the market is open.

The point is this… if you get a killer trade, like a great short at the top or a great long at the bottom, leave it open to feed your account with positive cash flow, which will help protect your usable margin in the event you have several bad trades that go against you.

So, let’s say you have a trade that is 500 pips to the positive and you have negative entries that total 400 pips to the negative. If you wanted to you could close your trade that’s up 500 pips and close your 400 pips worth of negative entries and you still come out 100 pips to the positive and your account is flat and you can start over again with minimal loss and a good frame of mind as opposed to taking a big hit and being gun-shy on your next trade.

This matter of building a buffer and keeping a buffer in your account is key to the risk and money management aspect of trading the Forex market. It can save you from a margin call and it can help keep the market from screwing with your mind.

Trade Team Update

As far as the market goes we certainly had an interesting day to kick off the trade week... the EUR/USD was by far and away correlated to the fundamentals and not nearly as correlated to oil and gold as in times past.

The move we made to the 1.5520 level was driven purely by strong euro inflation data and weak dollar growth and housing data. If it wasn't for the upside surprise to the TIC data, I believe we'd be pushing the 1.5550 level or better.

Oil was back on the rollercoaster from hell today making wild up and down price swings... gold made some decent gains today which added to the euro's fundamental move to the top of the range.

Eurozone Core CPI came in as expected and the non-core CPI came in a tick higher than expected. If the market had any doubts about the ECB remaining hawkish on rates and for the possibility of a 25bps hike next month, today's inflation data should take care of those doubts.

Today's Empire manufacturing data was abysmal... all the idiots who are thinking the Fed's going to hike rates in September got a nice little wake-up call this morning with the weak Empire data and the subsequent USD beat down.

Bernanke spoke today but he didn't say anything to take the market surprise. We also heard from Richmond Fed Lacker... they usually keep Lacker stuffed away in a broom closet and here's why... he told the market's that the U.S. economy was in great shape and that there's really no economic issues to contend with. Back to the broom closet for Lacker...

Tomorrow:

Fundamentally we have a mega day tomorrow... we get things kicked off with the important German ZEW data. The German and European investor has surprisingly remained resilient the past few months so I don't expect a major downside surprise tomorrow. Should the market get a downside shock within the ZEW that will likely translate in euro weakness.

But, there are bigger fish to fry later in the day... we're talking economic data overload tomorrow:

Housing Starts (growth/housing)
PPI (inflation)
Building Permits (growth)
Current Account (growth/manufacturing/exports/currency valuation)
Industrial Production (growth/GDP)

Those are the big ones, but there are more like Core PPI and the Capacity Utilization...

Based on today's NAHB data I'll have to call Housing Starts to stay to the downside. I do not expect a big upside surprise on this data. PPI/Core PPI should print strong to the upside for the USD.

Just with the price of energy remaining off-the-charts high there's really no way producers are going to see a decrease in the cost of doing business. Look at the cost of diesel fuel? It's staggering. Our poor truckers and trucking companies are paying a premium just to perform normal business activities.

And then there's the Current Account... it's this piece of data that has keep year's worth of downside pressure on the dollar... it's one of the main reasons the dollar's worthless and has persisted in being worthless. I think we could get a slight upside surprise on this data just for the fact the dollar has been weak all year long. Now, should we get a downside surprise this will only further remove the notion the Fed is going to cut rates in September.

Industrial Production should show more gains than the prior data and I expect more of a USD+ print here.

Overall, I see one of two things happening tomorrow fundamentally... we get mixed data out of Europe and the U.S. and the market gets overloaded with numbers that it sits there like a deer caught in the headlights... or the market just decides to push the EUR/USD around with a fair degree of confusion...

EUR/USD:

It's early yet, so I really don't have much more to add at this point... my trading will likely be on the conservative side heading into tomorrow's data releases... I might not even trade at all.

I didn't take a single trade today and it wasn't even an issue just to sit and watch. The longer I play this game the more I realize what a powerful thing patience is. I didn't see a trade I wanted, I didn't see a price I liked, so I didn't take a trade... it's really that simple. I encourage all traders to learn to practice this kind of patience because it could save you from getting into some bad trades that go against you...

I do have some key levels to offer:

Key upside levels:

1.5488
1.5504
1.5526
1.5548
1.5571

Key downside levels:

1.5454
1.5438
1.5419
1.5402
1.5389

You know the drill -- practice strict risk and money management

Trade Team Update

Today's market action could classified as text-book stupidity as far as I'm concerned... the stupidty started in mid-Tokyo session for absolutely no rhyme or reason and the stupidity persisted right through the close of NY.

Oil was the leader of the stupids... oil erratic price action sent the euro into another tailspin, dropping it about 200 pips and I now as I type this commentary I see the euro is attempting to claw its way back towards the 1.5500 level...

Gold was oil's half-retarded inbred brother today as it took another beating for no apparent reason. The Dow made a comeback of sorts today which didn't do anything to help the euro.

And then their was the 10-year making a healthy push towards the 4.20% level... clearly the bond market is screaming "inflation" at the top of its lungs. In addition the bond market has basically convinced itself the Fed is done cutting rates and is likely to raise rates sooner than later.

Now if you believe the Fed is going to raise in September you're either severly sleep deprived or severly unintelligent. Of course I cannot say "never" to anything in this market but with unemployment, housing, growth, and credit all still very much to the downside I see almost no way Bernanke can even consider raising rates.

The U.S. economy is not even close to being out of the woods yet. It's pure lunacy to even think the Fed is going to raise rates in just three months time because I don't see how the issues in the jobs market, housing, and the credit markets are going to solve themselves in that timeframe.

Plus, the Trade Balance and Current Account are in such abysmal states a rate hike now would severly jeapordize growth.

I believe Bernanke and the Fed are using their market-manipulating powers to give the USD a boost to not only ease the inflation issues a bit but to appease U.S. debt holders in Asia and the Middle East.

Philly Fed Plosser was running his mouth today about inflation and rates and was very hawkish. But, he's pretty much always been a hawk so the market didn't hear anything too shocking. If I had to pick any member of the Fed that I'd drink a beer with as opposed to cracking their skull with a Louisville Slugger it would have to be Plosser.

As I've said all week, it is the Fed and the ECB that is causing this market mayhem... it is the Fed and ECB causing all the markets to behave erratically and chaotically... they are toying with the markets and the markets are taking the bait.

Tomorrow:

We've had a wild week so far and there's no indication the insanity will let up as we get mega, ultra, monumental inflation data tomorrow. Tomorrow will be the true test of where the Fed really might stand on inflation...

And this test will come in the form of the Core CPI and CPI data... honestly, I don't even need to do any research or analysis on this one. If we're talking truth Core CPI should print at 0.5% or better. This means USD+. If the truth is going to be told and if the Fed is truly serious fighting inflation through monetary policy we'll almost have to see a hot USD+ print tomorrow.

One thing I cannot do with fundamental data is predict truth or lies. Nobody can. The only truth about fundamental data is that it's easily fudged and manipulated. Logical thinking would tell me we see a USD+ print.

We also get the Michigan Sentiment tomorrow which should print even weaken than the one released two weeks ago. The inflation expectations component, however, should print very USD+.

Don't forget that the G8 kicks off tomorrow in Osaka. My guess is that G8 is going to put the bulk of their focus on the inflation issue number one, then on commodities which are obviously fueling global inflation.

The G8 communique could contain some strong rhetoric to slow the oil market down and it may also urge central banks to get hawkish on rates. It is entirely possible the G8 talks up the dollar so be aware of this risk. I don't expect strong dollar rhetoric but I certainly wouldn't put it past a group of finance ministers to pull of those kind of shenanigans.

EUR/USD:

If the inflation data prints hot tomorrow you can expect another euro beat down fueled by lower commodity prices and higher bond yields. It's really that simple.

As far as trading goes I'm not changing my gameplan yet. I still have euro longs in drawdown but they are being well protected by my shorts I've taken on the slide down from the 1.5800 level.

We've dropped almost 500 points top to bottom this week. Yes, the market is do for a retrace back up to at least the 1.5600 level but there's absolutely no guarantees this will happen.

At this point I'm going to hang on to my euro longs that are in drawdown. This sharp drop is unwarranted in my opinion and there was really nothing fundamentally that changed this week to give the dollar such a fast boost.

Don't forget... in this market big, fast moves can be followed up with big, fast reversals. Again, there's no such thing as "always" in this market but I'm going to hold out on cutting my negative entries for now and see what the market wants to do.

The risk for today's trading (between now and market close on Friday) is that we drop another 120-180 pips to the downside... that's what I'm looking at for now.

As I type this commentary the market is still attempting a move back to the 1.5500 level but that momentum has slowed up a bit. If we can somehow sustain a break of the 1.5500 level and maintain this break into the London session this would be a decent sign the market will attempt to move higher to end out the trade week.

Later on tonight or early this morning I should have some key levels to offer when I get more clarity and the market gets more liquid.

we were looking at the amount of attempts the market was making to sustain a break below the 1.5400 level. We made 4 attempts and then went to the 1.5440 level. Then we returned back to make 4 more attempts before failing which is why I said we'd at least go back to the 1.5440 level which is precisely what we did about an hour ago. Keep your eye on price action attemps the next 20 hours of trading...

You know the drill -- be smart and don't overleverage. If you're already overleveraged get an exit plan together or stop trading until the market gives you an out.

And please don't be a dumb money trader...

Trade Team Update

Today's update is going to be a little different than the typical... we'll talk about the market and the euro of course but I'm also going to talk about risk and money management and I'm asking you to kindly to pay close attention to what I say... if you have to read it 10 times then read it 10 times...

Today:

The big questions in everyone's mind is: "why is the euro dropping and when is it going to stop?"

First of all there are several factors all working in unison to give the dollar a boost and to push the euro down. This sharp correction from the 1.5840 level is rooted in the underlying fundamentals of the market, specifically the interest rate fundamentals of the Fed and ECB.

Trichet and Bernanke are firmly entrenched in a battle of wills and a battle of words, with each of those market-manipulators trying to support their respective currencies while trying to scare the markets, specifically to cool the continued strength of commodities which is causing stifling inflation pressures.

Contrary to what I thought would happen last night, Bernanke came out with guns blazing again. Not only did this serve to push the euro down but it also caused Fed Funds to start pricing in a September rate hike. Yes, you did read this correctly... Fed Funds is now pricing in a 25bps rate hike just three months time. This is crap. It's ridiculous really.

Yes, I told you weeks ago the Fed was done cutting but I see absolutely no way the FOMC is going to vote on a rate hike in September. With unemployment rocketing up to 5.5%, with the Current Account and Trade Balance at their worst levels ever, and with the country loosing thousands of jobs each month, and with GDP barely showing any gains there is absolutely, positively no way the Fed is hiking rates in the fall unless we have a massive and almost instantaneous fundamental turnaround over the summer.

So, we've got Fed Funds giving the dollar a boost... what else? Well really all market correlated variables are working in favor of the dollar... gold got its butt kicked today, oil struggled to push higher, the 10-year yield ticked up and over 4.00%, and the Dow managed to hold on for dear life in today's trading.

Take today's Trade Balance for example -- it's the lowest print in 13-years. Even with a worthless dollar we're not seeing any easing of the tremendously USD- Trade Balance. This is very telling of the current situation.

And let's not overlook today's euro fundamentals -- French and Italian Industrial Production all printed to the upside and the German wholesale situation remains very inflationary. These are all very EUR+ factors.

Now I'm not trying to make a case for a strong euro but I am making the case against a strong dollar.

Tomorrow:

Be advised now: tomorrow does hold the risk of more dollar strength. Reason being, tomorrow is all about the Fed. Kohn and Kroszner are speaking and then we get the Beige Book. Neither Kohn or Kroszner is specifically scheduled to speak on monetary policy but you never know what they may throw in.

The biggest risk tomorrow for the euro lies within the Beige Book. I do expect the Beige book to have a bleak outlook on the overall economic and growth situation. The wild card will be how strong the rhetoric on inflation is. Should the Fed talk tough on inflation again through the Beige Book you can expect the dollar to make more gains on the euro. It's really that simple...

EUR/USD:

The market correlated variables are all working in favor of the dollar. The Fed is working in favor of the dollar and the banks are taking profits on long positions while running stops.

Can this persist? Absolutely. Do I think it's never going up again? Nope. But the euro is going to need some help and is going to need a boost from commodities and is going to need some big bank movers to step in and help reverse the current momentum push to the downside.

As far as trading goes, I'm still holding all euro longs. Last night I shorted the rise above the 1.5600 level which was according to my game plan to short the rises. I also addrd two more shorts this morning before we dropped to the 1.5440 level.

I suppose this is a good point to get into the risk management commentary I feel I must share with you...

Risk management:

Part of my personal risk and money management rules requires me to maintain a usable margin level of no less than 90% at all times and under all market conditions.

Because of my euro longs from 1.5702 down to 1.5640 were going into a higher degree of drawdown this put my usable margin in jeapordy of falling below my established 90% level.

Price action told me my margin was going to fall out of my comfort zone. Seeing this was going to happen, it was time to hedge -- to hedge against my dwindling usable margin.

Now, there were two ways I could have hedged/solved the margin issue. The first option was closing out all of my negative euro longs and covering those losses by closing out some of my really great euro swing longs. The losses on those negative entries could have been covered by me closing out one of my great euro longs from the 1.5100 level.

Based on current market conditions, this solution was not one I wanted to use. Now if I was convinced the market had zero chance of returning to at least the 1.5650 level I would have used this option.

Here's the lesson in this form of hedging option -- one of the reasons I hold on to trades that go hundreds and hundreds of pips into profit is so that I can use them to cover losses should I get caught going the wrong way and should my margin fall to uncomfortable levels.

Many ask, "how can you hold onto a trade that is up 400 pips and not take profits on it?" Well, some of those trades are used as "damage control" and not necessarily used as sources of big profits. This is a key aspect to my trading style.

This doesn't make sense to most people in the retail FX market but I do take trades not for the purpose of making big profits but for the purpose of covering losses should I need to. If I get myself into a margin mess and I find myself caught going the wrong way I know I have an out that is not going to hurt me too bad.

This is my own personal form of hedging that is unlike how most others hedge. I'm happy to take a loss knowing that I have the ability to make that loss a wash... so, if I'm in 400 pips worth of negative entries and I've got an open trade(s) that's 400 pips to the positive, I can wash out and breakeven on my losses.

As I said, I did not use this form of hedging to protect my margin in this particular case. I used the other form, which was adding short positions to feed my equity and usable margin against my negative entries that are sucking up equity and usable margin.

Because I am net euro long from 1.4595 all the way up to 1.5702, I can take shorts for free -- shorts that do not take any usable margin at all. Until last night I only had two open shorts, one at 1.6011 and one at 1.5810, so I have plenty of free margin to work with.

What I did was add enough shorts to stop my usable margin from bleeding. I didn't get it perfect but right now my margin is at 89% and it will not drop below there because of my short entries that are feeding me positive equity.

Now, are those equity-feeding shorts going to make me money? I sincerely hope not. That was not the purpose of taking them. They are not on my account to make me money they are on my account to prevent my usable margin from falling any further.

Should the market move back up, those equity-feeders will be closed at breakeven and then my negative entries will turn into positive entries and will cease from sucking up my equity and usable margin.

This is risk management 101 and this is how I manage and control risk. This is just how I do it and how it works best for me. The point is this: I have a risk plan and I follow it.

I've talked to a good number of panicked traders the past 24-hours who have not taken any risk management steps at all whatsoever. This is unacceptable and inexcusable behavior in my opinion.

I'll never tell a trader to manage risk the way I do but I will tell every trader to establish a risk management plan and follow it with military-style precision and discipline.

I have no sympathy for a trader that gets an MC. It's not me, it's not this blog, and it's certainly not the market that causes traders to margin call. Let me repeat: the currency market does not cause a trader to margin call! Is this clear? Do you understand this? If you get margin called you are the reason why. It's your fault and it's your problem because you didn't manage risk and you didn't have a gameplan and an exit plan.

Be smart.

Trade Team Update

We closed shorts that were in drawdown for profit, we took longs that went into drawdown and then closed those for profit, and now we're bought up for a return to test the topside. This is how the market is played... this is the game we're in and this life we lead. As I always say, this game is not for the emotionally weak and unstable and not for the mentally weak.

If you're looking for a "reason" why we moved the way we did today, don't waste you're on time overthinking those issues... today's action was very much a result of the continued shift within the underlying fundamentals of the market and the shifting monetary policy between the Fed and ECB.

The markets are nervous and jittery and these are the kinds of moves that happen when the markets are jittery and ill-liquid. U.S. banks are still in trouble -- USD fundamentals are still crap -- the Fed and ECB are sending mixed signals -- commodities are trading in a precarious spot -- the EUR/USD is trading in a precarious spot...

The market is looking for balance and equilibrium and some kind of a clear direction. What we're seeing is human emotions play out within the price action and within the price swings... we're seeing humans being humans and acting like fools to be honest... the price swings are fueled by fear, greed, anxiety, and uncertainty.

Many have asked me why I spend so much time studying human behavior, studying the body language and behavioral patterns of central bankers, and why I put so much emphesis on these factors. Well, today is a perfect example of why -- I never felt lost today and I wasn't the least bit fazed by the market's moves. I had no problems pulling the trigger on shorts and longs and letting them go into drawdown because as I factor in the human element to this market it helps give me clarity and helps make sense of the chaos.

Tomorrow:

Before we can even think about tomorrow's big data releases we still have Bernanke to contend with tonight. For me, nothing else matters until I hear what Bernanke has to say and then how the market reacts to it.

I do not like to speculate and make conjecture on what a central banker may say but I'm of the opinion Bernanke is not going to say anything too shocking or too USD+. This is just my opinion... please don't let my opinion persuade your trading because Bernanke could come out with guns blazing again. I don't see it happening, but I guess we'll find out in a few hours.

The big data tomorrow is the Trade Balance. The Trade Balance is one of the major thorns in the side of the USD... the abysmal Trade Balance is one of the main factors the USD is worthless and has persisted in being worthless. I see no relief here. I do think the continued weak dollar may cause the Trade Balance to print at or slightly above expected, but not quite enough to push the dollar up to any large degree against the euro.

That being said, should we get a big upside surprise this would come as a shock to the market and right now the market is dealing too well with shocks, so be aware of this...

In addition we'll get a speech by Dallas Fed Fisher who's more of a hawk. Fisher will be speaking about monetary policy and I'm sure he'll address the inflation issue in some form or fashion.

I sincerely hope you realize the Fed and ECB are toying with the markets... take Trichet for example... last Thursday he told the markets he was going to raise rates in July. Today, he said he's thinking about raising rates but there's really no guarantee he'll raise them in July.

Last week Bernanke came out over-the-top on inflation and talked the dollar up... well today some of the Feds were not nearly as hawkish on inflation as Bernanke was and didn't go to the lengths he did about inflation pressures.

And then today Chief Liar Hank Paulson actually came out and said that intervention was on the table...

Do you see what's happening here? These thieves and liars are toying with the markets and the markets are responding in chaotic fashion to their deception, their manipulation, and their games.

As traders in the currency market we need to realize what these price-fixers and manipulators are up to so we can beat them at their own game, we usually beat them at their game and now is not the time to get lazy but it's the time to stay smart and vigilient and methodical with how we trade this market.

EUR/USD:

I really have nothing new to say about the pair... I've been shorting the rises and buying the dips, simply following the same exact game plan that has paying me.

In the short-term I am biased euro long and believe we need to make a move back up after today's wild up and down price swings.

Many have asked, so here are my current open positions:

New Longs: 5622, 5640, 5684, 5702
New Shorts: 5810

I still have all euro swing longs from 4595 to 5389 open and I still have my euro swing short from 6011 open.

If you're having trouble making heads and tails of this market or you're scared by the volatility and the fear of the unknown, stay out. Very simple. I make sense out of chaos, so I'm going to hang on to my longs for a trip back up. And I will short again on the next rise up.

I do have some key levels to offer:

Key upside levels:

1.5652
1.5674
1.5688
1.5704
1.5726

Key downside levels:

1.5621
1.5603
1.5591
1.5582
1.5569

Short-term bias: euro long

You know the drill: be smart with trades, don't take knee-jerk trades, and manage your risk and money with precision during these times of heightened volatility.

EUR/USD Weekly Outlook 6/8 thru 6/13 2008

Based on this week’s fundamentals, Fed, and ECB activities I believe the up and down price swings will continue as the market seeks equilibrium in the light of shifting fundamentals, changing monetary policies between the two central banks, and speculation about future interest rate differentials between the U.S. and Eurozone.

In addition, commodities will still be the flavor of the week as oil will open up at record highs and as gold is testing a sustained break of the $900 level. And if that wasn’t enough, we’ll have a G7 meeting in Osaka starting on Friday and Saturday. Oh and there’s also a three day Fed pow wow on inflation and monetary policy being hosted by the Boston Fed… Bernanke and crew will be in attendance and will be speaking on these issues.

Fundamentally, this week’s big data will be Fed and ECB speeches on monetary policy and inflation, consumer inflation data, retail sales data, and growth data. The other fundamental aspect to be mindful of is the G7. I expect the G7 to focus on the big flavors of the week – inflation, commodities, and the sharp rise in volatility in the markets. Although the G7’s bark has been worse than their bite, the markets will be waiting and watching with a relatively higher degree of uncertainty.

There’s been renewed talk of intervention after oil gained $11 on Friday which was the single biggest one day move for crude. I absolutely expect the G7 to intervene this week, but it will likely only be verbal intervention, mostly through the G7’s communiqué and through the post-G7 press conferences with members of the Fed, ECB, U.S. Treasury, and various international finance ministers. If there is to be any form of intervention prior to the G7, it will likely come during tonight’s Tokyo session or first thing Monday morning – prepare accordingly should this occur. You’ve been forewarned.

Both the Fed and ECB are not happy with the sharp rise in commodities, specifically crude, as they know this is leading to a sharp and almost unbearable rise in food, transportation, and overall consumer costs. Based on my study and knowledge of behavioral patterns of the Fed and ECB and more so of Bernanke and Trichet, I believe the two central bankers were in contact over the weekend about Friday’s market madness and we could see the Fed and ECB step up their jawboning game early this week.

Tomorrow:

Tomorrow’s biggest fundamental data release is Pending Home Sales which should print at or below market expectations. There are really no signs of relief in the housing market, but this is pretty much a foregone conclusion at this point. Any bigger upside surprise would have a positive impact on the USD, but tomorrow’s focus will be on Trichet and Bernanke and whatever possible jawboning is done during tonight’s Tokyo session.

First up from the Fed tomorrow will be Timothy Geithner. Geithner is the president of the New York Fed, which is the most important regional branch of the Federal Reserve System. The NY Fed is where the Federal Reserve’s 24/7 Forex trade desk is located and the NY Fed plays the most important overall roll in the Fed. Geithner is schedule to speak on the economic situation and you can be assured the markets will be watching.

After Geithner we get Trichet. Trichet is not schedule to specifically speak on monetary policy but I would expect him to use the opportunity to at least mention something about price stability and rates. Later in the evening we get Bernanke. Bernanke will be speaking specifically on inflation. Although Bernanke will be speaking before Frankfurt, London, and New York are open don’t underestimate the power he has and the power the market has to make a big move should he say something that would cause a reaction. Again, you’ve been warned…

EUR/USD:

It’s entirely possible we see more fallout from Friday’s madness. NFP, which printed better than expected, will still be in the minds of traders. The unemployment rate ticked higher than expected and this was one of the catalysts for oil’s big move on Friday.

As far as I see it, the only thing that will cap the euro’s gains at this point would be some verbal intervention or a sharper sell-off / profit-taking with commodities. If the market is hell bent on sending the dollar lower across the board on all the major pairs I believe it’s going to take a shock and scare to slow them down and to halt the dollar’s renewed downward slide.

I’ve seen traders talking about the fact that the euro gained 400 pips last week and that surely we must get some retracement. I personally cannot think this way. It really doesn’t matter to me that the euro moved 400 points last week because I know why it did what it did. The mindset of “it can’t go up any further” is not something that ever comes into play with my forecasting and my overall trading.

This is a dangerous mindset to have in this market. The fundamentals of the market are still in favor of the euro and should the market correlated variables continue to move against the dollar it’s not going to matter much that we’re “due for a retracement”. Please don’t fool your mind into thinking this way.

I’ve also heard traders talking about the euro going back to 1.6000++. This is not an area I’m personally targeting at this point. The markets got shocked on Friday and when the markets get shocked we see shocking moves. As soon as this shock wears off, the next shock will likely determine where the euro goes next.

With all the Fed, ECB, and G7 activities happening this week I do expect the markets to get another shock or multiple shocks. Let’s remember that one of the roles of central bankers is to price fix markets and manipulate markets through monetary and rate policies. Well, those master price fixers will be on center stage this week. Once again, you’ve been warned…

As far as trading goes I will continue to follow the exact trading game plan until the market shows me otherwise. If you read any of my updates you will know that I’ve been buying the euro on the dips and shorting the euro on the rises.

I do have euro shorts that are in drawdown and I’ve already received some negative feedback about this and even some saying “I’m on the wrong side of the market.” This is stupid. I’m following a game plan that I’ve established for my trading. I have open shorts at 1.5552 and 1.5745 – I’m simply shorting the rises. I’m still net euro long all the way down to 1.4595 and I still have open shorts at 1.6011 and 1.5804.

Do you really think I’m concerned about two small shorts in drawdown when I’ve got open longs and shorts well in profit that are feeding me healthy equity? In addition, because I’m still net long on the euro those two shorts didn’t even cost me any usable margin to take the trade, which is even better.

If traders cannot understand these concepts they have zero business being in the Forex market. If people want to criticize my trading and mock my trading style, do it out in the open in our forums or chat and don’t let me hear about it second hand. Or, leave the community and don’t follow what I say and I do in this market.

I can have trades that go into several hundred pips worth of drawdown and not even blink an eye because I am following a strict game plan and I am managing my risk with the precision of a surgeon. My accounts are not overleveraged therefore it is not an issue. Traders that get themselves overleveraged and make stupid trades are usually the first ones to whine and moan when the market doesn’t initially go their way.

I’m a patient trader and all traders need patience to survive this market. A negative entry is not a loss until it’s closed out for a loss. This is another simple concept that seems to be misunderstood. I don’t always look at the day-to-day moves but I’m also looking at the bigger picture based on the underlying fundamentals of the market. If you cannot or do not understand that this is a factor in my trading, either leave or don’t follow what I say and do.

Now as far as the EUR/USD is concerned as I said earlier it’s next moves will largely be dictated by what commodities and equities do and by any possible verbal intervention from the Fed and ECB. When the market closed on Friday price action was still clear to the upside and we could see more initial gains when the market opens later on.

I absolutely, positively will not take on any new trades when the market opens and will likely wait until at least London opens before I do anything. I’m heading into this week with an extreme amount of caution. It’s just a feeling, but I think somebody is going to run their mouth between Sunday and Tuesday. I can’t speculate on who it will be or what they will say, but it’s just a gut feeling I have.

Overall, I’m still bearish on the euro and will keep shorting the rises. The next big upside hurdle the euro will have to overcome is sustaining a break above 1.5824. After that the euro will have to sustain a break of the 1.5850-1.5870 levels. On the downside the euro should find support around the 1.5740 level. Below there should be support around the 1.5680 level. Again, the whole market could change with a few choice words or actions…

If you’re an undisciplined risk and money manager I hope you got a needed wake up call last week. It is absolutely imperative you do not over leverage this week. It is critical you do not take dumb knee-jerk trades and that you establish a solid trading plan to manage your risk and manage your entries.

Those of you who are of the mindset that the euro “can’t go up any higher” need to reevaluate your way of thinking. There is no such thing as “can’t”, “never”, and “always” in this market. If you think the market “can’t” do such and such, the market’s already got you beat so you might as well close down your trade station and invest in municipal bonds.

Be smart.

Trade Team Update

I'm going to make this market re-cap short and sweet... we moved about 240 pips today. Why? Trichet. Why Trichet? He told the markets the ECB was strongly considering a rate hike at their July meeting because inflation is rising in the Eurozone and the governing council of the ECB does not see any relief to the price instability.

Trichet was wildly over-the-top on inflation/price stability. Dovish tones on growth were clearly lacking. Most of his speech was focused directly on inflation and on the ECB's potential moves to fight inflation.

Trichet gave the market a signal that the ECB is prepared to hike rates in July and he gave zero indication that a rate cut would be happening anytime soon. His words and his signal sent the EUR/USD from 1.5363 to 1.5601 in today's trading.

Do you now see the power of the central bank? Do you see the power of monetary policy rhetoric? Do you see how important interest rate policy is in this market? If you didn't realize this before, you better realize it now.

Bernanke dropped the euro 200+ pips with his rhetoric on inflation. Trichet sent the euro skyrocketing 200+ pips with his rhetoric on inflation. These are fundamental moves that are driven by interest rate and monetary policy.

I truly hope those that needed a wake-up call got it today. Everybody here should have been euro long heading into Trichet's press conference. We were long all night and I gave zero indicators to short and I did not close my longs until we broke the 1.5500+ level.

That's basically it. If you're looking for some deep, eloquent explanation for today's moves, there is none. Trichet pushed it up and commodities kept it up in late afternoon trading. It's that simple.

NFP and EUR/USD:

Tomorrow is the long awaited and much anticipated NFP. This morning I started getting the first requests that I always get every single pre-NFP... "should I go short or long?"

I've said it before and I'll say it again -- that is not how NFP works... it is not cut-and-dry, it is not black and white, it is not a 1-2-3 situation... you're dealing with fresh data and revisions. You're dealing economists forecasting and bank trader forecasting which often contradict each other. You're dealing with billions of liquid cash flowing in and out of the market upon news release. And, you're dealing with fudged and manipulated data that is comprised in illogical and fallable ways.

So, do you still honestly want to trade NFP? You think you can go toe-to-toe with the big bank movers? Be my guest... but, I'm not and never will tell anybody a trade to take on NFP. In the name of risk management, please don't trade NFP. If you must, trade it on a demo and maybe that will give you some of the thrills you're looking for without risking a margin call.

As far as NFP is concerned, the forecasts range from a net loss of anywhere from -42K to -68K jobs. The unemployment rate is forecasted to tick up. The overall market forecast is very USD- for NFP.

Based on my own research and based on current market conditions, I am not looking at NFP moving the market anymore than 150-180 pips tomorrow. At this point my research tells me to go in short. Again, this is just what I'm seeing and what my game plan is at this stage. Conditions can change and if they do, I will adjust with the changing conditions.

I do encourage you to do your own research and come up with a game plan and then give it a go on a demo to see how you make out. There's nothing wrong with that and it would be a good exercise. But please, do not throw real money into the market tomorrow morning.

I'm still overall bearish on the euro even after Trichet's comments. Trichet was talking tough but now he needs to back up his words with actions.

If the market does decide to take the euro up tomorrow I believe it could face some decent resistance around the 1.5680 to 1.5720 level. I'm not giving any key levels tonight because I don't want to do anything to tempt traders from taking any more entries this week.

Be careful and be smart...

Trade Team Update

Although we were stuck in a tight range today the trading was spectacular,I love the volatilty of 200 pip moves but I certainly can't complain when the market is holding out its hand to give easy pips.

We did have some key fundamental data released but as I indicated in yesterday's update I was not the least bit concerned with that and I was focused on Bernanke. Obviously the market was thinking the same way.

Bernanke was again hawkish on inflation but not nearly as hawkish as he was yesterday. The reason we moved big yesterday and not at all today was because Bernanke shocked the markets with his hawkish inflation tones. When the most powerful central banker on earth shocks the markets, the markets move.

Bernanke did downplay the connection between the 1970's inflation debacle and today's inflation situation. He basically said there was no similarities and that the U.S. would not suffer the same way.

I do not totally agree with his assesment. I think overall inflation is not much different between then and now. When you compare food and fuel prices between 1975 and 2008 and then you factor in the massive devaluation of the dollar you very much have the same situation. I'm not a Harvard educated economist but after doing some basic research it's pretty clear to me that the 2008 value of the dollar doesn't buy you any more than the 1975 value of the dollar when adjusted for not only inflation but for depriciation.

One of the other reasons I cannot agree with Bernanke is because the financial landscape in America is totally different in 2008 than it was in 1975. There has been massive wealth expansion in the U.S. between the late 1980's and 2008. There is a higher concentration of per capita wealth in the U.S. presently. This means the U.S. consumer is more enabled to spend in 2008 compared to 1975. The inflation is the same but the consumer is more equipped financially to deal with the price instability.

In addition, there has been a massive expansion in credit, lending, and debt since 1975. The U.S. consumer has many more avenues to access credit as opposed to the consumer in 1975. In 1975 consumers were not carrying multiple lines of credit as they do in 2008... in 1975 consumers didn't have equity in their homes to use as an ATM machine as they do now.

The point is, I don't see any difference between 1975 inflation and 2008 inflation, the only real difference is consumers have more disposable cash and access to credit to keep spending and to keep paying inflated prices on food, fuel, and consumer staples.

But now the dollar is even more devalued than it was in the 1970's and the inflation situation is the same, it's just easier for the consumer to manage because of the easy access to use debt and credit as a means of purchasing power.

Bottomline -- Bernanke is an idiot.

Tomorrow:

If you like a good circus side show, tune in to Trichet's press conference tomorrow morning. The market's are anxious to hear how Trichet is going to balance his rhetoric between rising Eurozone inflation and falling Eurozone growth.

Tomorrow is all about the ECB and Trichet. The ECB cannot cut rates and they cannot raise rates. Inflation is too high for the ECB to cut and growth is slowing too much for the ECB to raise. The ECB will hold rates steady at 4.00% tomorrow.

All eyes and ears will be on Trichet and will be listening to how he tempers the inflation and growth situation. Overall, I expect to hear Trichet stay on the hawkish side of the fence. Where things will get a little dicey tomorrow is if Trichet ups his dovish rhetoric on growth, credit expansion, the consumer sector, and the employment sector.

The market is expecting Trichet to talk tough on price stability. Where Trichet could shock the market is if he repeats his downside tones on growth like he did three months ago. Any strong rhetoric on falling growth should put a hurting on the euro. The market is looking for reasons to sell-off th euro and Trichet could give a great reason tomorrow...

You can expect the cadre of journalists to press Mademoiselle Trichet on future ECB monetary policy, specifically on the future of the ECB's key lending rate. We'll probably see his hands flying and fingers pointing pretty quickly into the Q and A session with the media...

Again, there is no bigger fundamental even than Trichet tomorrow... it is imperative you tune in and watch.

EUR/USD:

I don't really have much to say about the euro right now. We'll be in a fairly tight range until tomorrow morning... it's very unlikely we'll see any big moves before then.

I will certainly be flattening out as we lead up to Trichet... I'm not taking any useless risks and I suggest you do the same. Yesterday you saw the power a central banker has to move the market... Trichet has this same power.

Overall I'm still bearish on the euro and I will continue shorting the rises. Upside momentum is lacking at the present. But, we know what the markets are waiting for...

The market is ill-liquid right now and price action is hard to read, but I will offer these key levels based on current market conditions...

Key upside levels:

1.5454
1.5472
1.5488
1.5497
1.5504

Key downside levels:

1.5411
1.5401
1.5386
1.5363
1.5348

You know the drill -- be smart, don't overleverage, and don't take any dumb knee-jerk trades the next 12-hours.