Trade Team Update

An excerpt from yesterday's Trade Team Update:

I think we're getting close to hearing some hawkish tones on inflation from Bernanke

If you're still scratching your head trying to figure out why the EUR dropped 220 pips top to bottom, there's your answer.

Bernanke came out with guns blazing today on inflation... he was hawkish, very hawkish. I knew we were due to hear some hawkish tones from Bernanke and we certainly got them today.

After the last FOMC meeting I called an end to Fed rate cuts. I think Bernanke signaled the end of Fed rate cuts with today's speech. The market certainly took it that way as you saw. Obviously I'm going to stick with my call on Fed rates after what I heard today.

Really, that's the whole explanation for why we made a 220 pip drop. Are we going to drop another 220 pips tomorrow? Nope. But this only further fuels my overall euro bearish bias.

I have to repeat one of my favorite lines: the #1 key driver of the FX market is all things interest rate related... interest rates, interest rate policy, and interest rate futures rule the FX market. Interest rate activities make the market move. Bernanke's rhetoric had direct connection to Fed interest rate policy. His words were bullish in regards to Fed rates and this gave the dollar a slight boost today. It's really that simple.

Giving the dollar an added boost was USD+ Factory Orders and falling oil and gold prices. The 10-year briefly popped up over 4.00% again which also helped.

When you take your eyes off the lagging indicators and you put them on the market, not a historical image of the market, but on the actual market itself, all of these things become very clear, and this is why I always say things like "it's that simple" because it really is...

EUR/USD:

This might come as a shock, but I'm not even concerned about tomorrow's data releases... I am absolutely, positively focused on the real-time price action and will be totally focused on what Bernanke has to say tomorrow during his afternoon speech... this is all that matters to me right now.

I already know the fundamental shifting between the U.S. and Eurozone is happening. We told you months ago it would begin happening in the middle of this year.

It is imperative that you understand the market is going through a season of shifting fundamentals and shifting monetary policy between the Fed and ECB... it is imperative you recognize the Fed is now moving towards a more USD+ monetary policy and is beginning to address the inflation issue while the ECB should start turning more dovish on inflation and signal a rate cut soon.

While we're in this season of shifting fundamentals and shifting monetary policy the market is going to behave in ways that sometimes seem very odd and confusing. But, if you are solid on your fundamental views of the market, you should be gaining a clear understanding of this and how it's going to effect the EUR/USD in the months to come.

If things continue to move on this course the EUR/USD will not be in the 1.500's a few months from now... commodities should ease and the dollar should make some gains. What's happening now is certainly not a mystery to anyone here as we forecasted this months ago. But, it's happening now as we speak... it's playing out before our eyes. I hope you see it.

As far as trading goes please bear in mind we're in an NFP week and the market does odd things during NFP weeks. Unless I see otherwise I'm sticking to the very same gameplan... buying dips, shorting rises.

I see no need to change up my gameplan now because it's been working well and profitibly. This being said, I'm going to scale my trading back as we draw closer to NFP, and of course as we draw closer to Thursday's Trichet event.

I absolutely do not want to get stuck in a trade or get stuck in needless drawdown under these market conditions. I highly encourage you to be smart with your trades, smart with your risk and money management, and not to push trades.

Again, please do not overleverage your account under these market conditions as it could cost you dearly. If you're new here, don't even bother trading during this NFP week and use your time to read our forums and get caught up to speed on how we do things around here.

Most of you should have made tremendous profits so far this week -- well, don't give them back! Be smart!