Trade Team Update

Once again the euro put in another strong performance today, not surprising though... throughout the night and early morning in all of my updates I indicated price action was clear to the upside so hopefuly you either bought or stayed long today...

The results of the events between 0745 and 0830 tomorrow will likely set the general near-term trend and direction for the EUR/USD. The future of the pair largely rests in the hands of Jean-Claude Trichet. He's got the power and authority to either make or break the euro.

The entire world will be watching... all global markets will be watching and waiting and ready to act upon the ECB rate decision and upon what Trichet has to say at the proceeding press conference.

Tomorrow's ECB/NFP combo is shaping up to be an event of Biblical proportions... this will be the currency market's equivilent of David vs. Goliath... David being the USD and Goliath being the EUR. The only difference is David might not win the day against Goliath like he does in the Bible passage.

Each event has the power and potential to both positively or negatively effect each other which makes things doubly complicated for us traders. I'm going to give you the possible scenarios for how things could potentially play out tomorrow and what I think the probabilities are.

I cannot find words to strongly caution you not to trade tomorrow. The potential that exists for absolutely chaotic and wild price swings is off-the-charts. I know some of you got burnt trying to trade last month's NFP. Do you really want to put yourself through that stress again? Is it worth it?

ECB:

It's been about a year or so since the ECB last hiked interest rates. In the meantime the Fed has cut interest rates 325bps starting last September through April of this year. During this period the euro has gained almost 2,800 points on the dollar mostly on the back of the EUR+ interest rate differential.

Basically all traders, all economists, all politicians, all "gurus", all finance ministers, and all markets are fully expecting no less than a 25bps hike tomorrow. The market's probability of a hike is about 100%, especially after this morning's comments from Trichet.

European finance ministers and politicians spent all day today begging Trichet not to raise rates tomorrow... they are whining, moaning, pleading, and demanding Trichet to keep rates at 4.00%. Trichet has promised the markets a hike tomorrow. His credibility is on the line. The future credibility of the ECB is on the line.

So, lets first look at what I think the possible scenarios are for the actual rate decision...

The biggest sham in the history of speculative markets: it is entirely possible that Trichet is about to pull one of the biggest shams ever in the history of the markets... it's no secret that the Fed and ECB work hand-in-hand to manipulate the markets and to price-fix the markets. Bernanke and Trichet are in constant contact and we know that the Fed and ECB have a see-saw type relationship going.

If the situation is that Trichet and Bernanke have brokered a deal to "intervene" on behalf of the USD and to knock the wind out of surging commodities there's no better way to do this than to tell the markets you're going to raise rates and then not raise them.

The U.S. and Eurozone both have inflation issues that are totally out of control and need to be reigned in. In addition to stifling inflation the majority of the Eurozone is suffering from a coming economic downturn that will be hastened with a rate hike.

The only way to combat the inflation issue without sending the dollar to its grave is to trick the markets into thinking the ECB will raise rates and then shock them by holding rates.

Now, I don't give this scenario a very high probability but it's certainly something I'm prepared for and will act upon should this play out tomorrow. It Trichet doesn't raise and his more dovish in his press conference you can expect the EUR to eventually work its way back down to the 1.5300-1.5100 levels in the near-term.

25bps hike: this is the mostly widely expected scenario that the markets are thinking. I'm not going to expound on all the reasons why Trichet would hike 25bps as they are obvious.

They key is what would a 25bps hike do to the euro? Well, initially it should send the pair up towards a test of the all-time high at the 1.6000 level. Even though the market is expecting this action from the ECB it's not fully "priced in" as many have said. The euro will gain on the dollar on the back of a rate hike, guaranteed.

A 25bps hike would send commodities higher, it would send German bund yields higher, it would send U.S. bond yields lower, it would send the equities markets into a tailspin, and most of Europe will be brought to their knees begging for mercy.

A combo rate hike and hawkish Trichet will just about assure a move back to test the all-time high at 1.6018 and would likely send the euro even high than that in the short-term. But, this will also renew fears about physical intervention from the Fed and ECB, especially if the USD Index dips below the key 70 level. A dip below 70 on the USD Index would put things in "heads-will-roll" territory which ups the odds of intervention.

My probability of a 25bps hike: 74%

A less than 25bps rate hike: the ECB has never hiked or cut an odd number but I think there's a good probability we could see an odd rate hike number of like 15bps or 12bps or 20bps, etc.

That could be the ECB's way of fulling their promise to hike rates but also to shock the markets into not hammering the USD too bad. I can't speculate on exactly what would happen if the ECB did an odd numbered rate hike but I think the immediate reaction would be EUR+.

This type of move would certainly cause an enormous amount of confusion and conjecture within the markets, so it's really anybody's guess on how it would all play out.

My probability of a less than 25bps hike: 82%

Overall, I'm more biased that we'll see some sort of a rate hike tomorrow. I've spent a lot of time studying Trichet and his behavorial patterns and I do not feel he would put his credibility at stake by shocking the markets with a no hike.

My overall probability of some kind of rate hike tomorrow is 78%. What else can be said? Those are the only scenarios I can see possibly playing out tomorrow.

NFP:

Tomorrow's NFP is not getting quite as much attention as Trichet but this event should not be considered playing second fiddle to the rate decision. Expectations for an absolutely abysmal NFP are running hot.

At the start of the week economists were forecasting job losses between -50K and -80K roughly... now they are forecasting job losses in the triple digits with some going as high as -111K. They are also forecasting an uptick in the unemployment rate.

To be honest with you I've been totally focused on the ECB and have not done my normal NFP research. I do expect the unemployment rate to tick up. I'm not convinced we'll see triple digit job losses though.

Now, should NFP come in worse than expected and should the unemployment rate go up coupled with an ECB rate hike I don't think I need to tell you what's going to happen to the USD...

I am forecasting a USD- NFP and unemployment rate. I do not have any probabilities on this as I've not done much research on how the data might print.

EUR/USD:

It's obvious what's at stake tomorrow... a rate hike, a hawkish Trichet, and a USD- negative NFP will crush the dollar and likely send the EUR/USD to a rise of 150-240 pips Thursday/Friday... and by the beginning of next week we could be comfortably over the 1.6000 level.

A non rate hike, a dovish Trichet and a USD- NFP will likely do little or no damage to the USD and the end result should be strong USD gains after the dust settles and the market sets the trend.

And should all events and factors turn out to be USD+ tomorrow we'll be on the train back towards the 1.5300 level or better in the short-term. If all factors are to play out USD+ positive this will send utter shocks to all markets and commodities especially would likely have a meltdown.

We'd see heavy profit-taking and heavy stoploss triggering as the euro, gold, and oil all have a meltdown.

As for me and my trading I'm really not going to do anything to prepare for tomorrow. On all accounts my lowest usable margin percentage is 96%. This means the market can literally do whatever it wants and I'm in no jeapordy at all whatsoever.

If I do trade tomorrow's events it will likely be a game-time decision based on what the ECB and NFP results are. On all accounts I have plenty of usable margin and plenty of free usable margin to make trades. It can run to 1.6000 or run to 1.5600 for all I care, either way I'll be making money...

It's quite possible I do some euro buying tonight... it really all depends on what I see with the price action. I haven't made up my mind yet if I want to position myself ahead of time or not. I really don't want to go long up at these levels but I have plenty of margin to do so and plenty of open entries that are well into profit to cover any losses I may have to take.

That's about all I have to say at this point... those are my thoughts and opinions. Don't listen to me though... you come to your own conclusions and your own opinions.

I urge you not to expose your account to the tremendously high risks that tomorrow holds. Play on a demo if you must. If your usable margin is below 85% I would suggest you take steps to get your account in better shape and at a safer place.

Be smart the rest of this week please...