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.