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.

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!

EUR/USD Weekly Outlook 6/1 thru 6/6 2008

I hope you got some good rest over the weekend as this week carries a high probability to be volatile with all the key data we have on the books.

In addition to the ECB rate decision, Trichet press conference, and NFP, we also get tons of growth, production, and consumer data for both the U.S. and Eurozone. Plus, we get two speeches by Bernanke and a total of four speeches by Trichet. And if that wasn't enough, we also get speeches from Kroszner, Lockhart, Plosser, and Bullard.

Both the Fed and ECB will be talking about their respective economic situations, monetary policy, inflation, growth, and their economic futures. As you plan your trade week, don't forget to factor in the Fed and ECB's market-moving powers...

Thursday and Friday will be the most critical trade days this week. The ECB, Trichet, NFP, and the Unemployment Rate will take center stage. But don't expect the market to just sit around and wait for Thursday and Friday's data... we will be moving this week and we are inching even closer to a bigger extended move out of the relatively tight range we've been trading in the past 2-3 weeks.

Tomorrow:

As soon as Wall St. opens tomorrow we'll get Trichet's first speech of the week. I'm not expecting him to say anything earth-shattering tomorrow and he's not scheduled specifically to talk about monetary policy but it's important we listen nonetheless.

ISM is our big news on Monday. I'm not officially ready to call a bottom on the U.S. manufacturing downturn but I do believe the worst of the weakness has been felt by the economy and absorbed by the market.

Based on my research I believe we see the manufacturing sector begin to make some small gains and take back some ground that has been lost the past 12-14 months. Manufacturing employment has begun to stabilize, inventories are flowing more in positive territory, and prices paid are looking more and more inflationary... all of those factors are USD+.

The market will pay close attention to the employment and prices component in tomorrow's ISM data. With the continued high cost of fuel I would expect the prices component to print to the upside. Overall, ISM should print at or above market consensus.

The other thing to keep in mind with this week's fundamentals is the fact that we are starting a brand new month this week. Banks and traders have already squared their books for May and will be looking to re-position for the current month.

Certainly gold and especially oil will stay in the market's focus this week. Last Thursday crude inventories printed way to the downside but we didn't see a whole lot of reaction to the shockingly low number. If there is a reaction, it could come early this week.

Should commodities continue to push north and test the upside obviously this will keep the euro well supported vs. the dollar. If the opposite occurs, well, you know what the result will be...

Bonds:

I haven't said much about the 10-year the past few weeks mostly because it's been ranging as the market has been trying to figure out what to do with the euro and the dollar. But I want you to keep an eye on the 10-year this week.

The 10-year has been brought off life support and certainly gave the USD a boost last week as the yield made gains up above 4.10%. What does this tell me? Well, first of all, it only further confirms my opinion that the Fed is done cutting interest rates.

If the bond market wanted more rate cuts or thought that more rate cuts were coming we wouldn't be seeing the 10-year yield firmly above the 4.00% level right now. The moves in bond yields are such great overall market indicators, especially if you trade the EUR/USD.

EUR/USD:

Monetary policy, interest-rate connected fundamentals, commodities, and key price levels are all the flavor of this week's trading for the EUR/USD.

I'm still overall bearish on the euro but at this point on Sunday I have no reason to change up my trade plan. The euro has been falling at some key upside levels and the dollar has been falling at some key downside levels and this is why we've been in a range, floating back and forth through some precarious price levels.

Staying firmly above the 1.5380 level will keep any dollar gains capped for now, and staying below the 1.5800 level will cap any big euro gains for now. The dollar is still fundamentally weak but the euro is picking up more momentum to becoming fundamentally weak.

This is why Trichet's comments on Thursday will be so critical to the near-term future of the euro. Slowing Eurozone growth has kept Trichet unable to raise rates and strong upsides to inflation has kept him from cutting rates. I still believe we can see an ECB rate cut of 25bps before 2008 is done, but the market has not been given any real signals of this happening yet.

As far as trading goes, I will continue to buy the euro on dips and short the euro on the rises.

I don't have any key levels yet as the market is still several hours from opening, but overall, in order for the euro to make any real topside gains the euro will have to sustain a break of the 1.5670-1.5730 levels. If we make several repeated failures at the 1.5600 level this would be something to take note of.

I would urge you to be strict with your risk and money management disciplines this week. If you don't see a trade, don't take a trade. Wait for your price, wait for the market to come to you, and please don't make any knee-jerk trades. You do not have to be in the market every waking moment -- it's OK to be flat and to wait for the trade to come to you!

Be smart -- don't overleverage your accounts -- don't take dumb trades -- allow the trades to come to you...