Trade Team Update

Well, the market's been pretty quiet the past 24-hours, so I guess we really don't have much to talk about today...

WAIT!

In case you were hibernating, we basically had the EUR/USD make a 500 pip roundtrip between the market's open yesterday and the NY session today...

First, lets re-cap what happened, then we'll look at tomorrow's fundamentals, FOMC, and some possibilities for the euro in the near-term...

As is typical between 5:01 p.m. EST and 5:59 p.m. EST, which is super-low on liquidity, I believe we saw some stop hunting and stoploss triggering yesterday as the market ran up, taking off at 1.5682, only to return back to 1.5682 exactly 90 minutes later...

But not too long after that we got the big news over the wires that the Fed cut interest rates on the discount lending window (not to be confused with the Fed Funds target rate).

That's all the market needed to take us back up to make a string of new all-time highs before topping out at the 1.5900 level... that very violent and exaggerated move we saw last night is what happens when anything related to interest rates are suddenly changed... it is rare for the EUR/USD to make that big of an extended move -- typically, the only thing that will ever cause such a move is a terrorist attack or a change in interest rate policy... so once again we see how critical the matter of interest rates and interest rate policies is to our market...

By mid-morning, the EUR/USD had once again returned back to the point of lift-off which fits right in with it's consistent price patterns...

Now what? First thing we need to do is get through tomorrow in order to paint a clearer picture of the future...

Tomorrow:

In addition to the FOMC, we have a string of key U.S. data release, however, none are as important and critical as what will happen at 1415 EST.

Besides the interest rate policy, the two biggest pieces of data are PPI and Housing Starts...

PPI -- producer/manufacturer inflation data... the market is forecasting a rather sharp decline in producer inflation from last month... I don't believe this at all, but as we saw with CPI, I suppose the number will print to show zero or almost zero inflation in the production sector... based on my research and based on what's happened with commodities during Q1 of this year, we should see a PPI number of between 1.5% and 2.5%.

This will never be revealed as long as the Fed stays in a rate cut cylcle -- you can't admittedly have consumer and producer inflation and cut rates, so we'll surely be lied to again tomorrow.

Housing Starts -- there's been absolutely no visible or viable signs of relief in the new construction sector... construction layoffs continue to persist... new home loans are down, plus with the sharp decline in the employment sector and the overall slowdown with the consumer, there's almost no way we see a USD+ positive print on this one... banks are not lending, consumers are not buying, builders are not building, pretty simple.

Overall, I don't expect any upside USD+ surprises tomorrow on this data...

FOMC:

What's the Fed going to do tomorrow? I have no idea. I don't even really care to be honest... My accounts are ready to take whatever the Fed throws our way...

I've spent the last two weeks preparing my accounts for tomorrow... I've cut euro shorts that were in the negative and have not taken any euro longs at the top of the range... I'm net euro long and I have tight take-profit orders on my highest euro longs and I have tons of free margin to take shorts should we get a surprise tomorrow...

I'm not bragging, just explaining why I have little concern with what the Fed does tomorrow and revealing how I prepare my accounts and protect my margin for rate decision times, especially when there's a lot of unknowns...

Lets take a look at some of the possibilities for tomorrow:

No cut -- this is a no-brainer... if the Fed shocks the markets by holding rates steady at 3.00% we could very well see a violent drop in the EUR/USD tomorrow. A no cut would be the first step in the direction of correction... I have little expection of Bernanke holding rates, he's too much of a manipulative price-fixer to do such a thing, but I'm certainly prepared for a shock of this magnitude.

25bps -- there's probably a better chance of a no cut than there is for a measly 25bps cut... if it were to happen, I think it could initially be USD+ but a cut is a cut and it would just further widen the interest rate differential between the U.S. and Europe...

50bps -- there's a decent probability we see a half point cut tomorrow... if this were to happen we might see some initial volatility but I would imagine the market would just continue on selling dollars and buying euros in the near term...

75bps -- I hate trying to predict these things, but if I had to venture a guess it would be that we get a 75bps cut tomorrow... a good number of economists are forecasting this and most of the market players are expecting this... again, it would just serve to further widen the already lopsided interest rate differential between the dollar and the euro and just give the banks more reason to keep pushing the euro higher in the near-term...

100-125bps -- any cut of 100bps or higher would be a real shock to the markets, I believe, and the result would likely be a violent dollar sell-off acrossed the board. The bond market is clearly begging for this kind of cut, Wall St. wants this kind of cut, and with the Fed lying about the lack of inflation, it would not at all surprise me to see a fat 100bps cut.

If the Fed cut by 100bps tomorrow that would put the Fed Funds target rate at 2.00% vs. the ECB's key lending rate of 4.00%. The 200bps differential between the dollar and the euro could be the final nail in the coffin for the dollar and ultimately send the USD Index into the 60's...

Should the Fed cut more than 100bps tomorrow, we could see a very violent crash of the dollar at which point the only saviour of the dollar would be a tag-team operation between the Fed, ECB, BOE, and BOJ to physically buy dollars...

Thus far all verbal intervention has failed miserably... we got some more verbal intervention today which dropped the euro 80 pips, then it was back to business as usual... somebody will have to cowboy up if they want to see the dollar resurrected from the dead..

I think if the Fed shocks the market with a no cut or a small rate cut, it's entirely possible we saw our top for now at 1.5900... many traders have asked my target for this move we've been on and as I wrote last night I'm looking at anywhere from a 1550 to 1750 pip move from the bottom we made at 1.4380.

1550 pips, bottom to top, would have put us around 1.5930... 1750 pips, bottom to top, would put us around 1.6130. Last night we came within less than 30 pips of my first target of 1.5930...

How I arrive at those targets, based on pip moves, is a combination of fundamental and price action factors, market momentum, overall market sentiment, and interest rate factors...

Now at this point I do not see a clear signal to cause me to close out most of my best euro longs and start adding shorts... I need more confirmation and I believe tomorrow's FOMC will give me a good deal of confirmation for what I'm looking for...

Should the Fed give the market a fat rate cut tomorrow, we'll likely be back on the train to 1.6000 unless somebody blows up the tracks before we get there...

Trade Team Update

Surprise, surprise, another day, another new all-time high... we've got a lot to cover today, so lets get right into it...

Well, the excitement from yesterday's Fed liquidity move didn't last long and the market was back to pushing the euro north... no big shock there...

There were two very specific comments made early this morning that got the ball rolling and helped light the torch to push the EUR/USD to new all-time highs at 1.5570. And here they are:

UAE Economic Minister: Changing USD peg may ease inflation

China Commerce Minister Chen: China wants to invest more FX reserves abroad

And that's all the market needed to hear to go nuts and start buying euros and selling dollars... I don't want to say "I told you so," but I do want to call to your memory something I posted in Sunday's update:

China -- with the USD at multi-week lows against the euro and as reflected through the USD Index, it's very likely we could hear from one or more Chinese government finance officials about the weak dollar, about currency reserve shifting, re-positioning with U.S. debt instruments, or a combo of the three.

The EUR/USD was also helped along by oil pushing well over $110 and by gold continuing it's bullish run... in addition, as the dollar plunged against the euro the 10-year yield tanked, only further helping to fuel the fire... basically all of the key market correlated variables were working against the dollar and for the euro in today's market action...

EUR/USD:

First of all, we have some mega fundamentals tomorrow, the biggest of which is Core Retail Sales... to be honest, my brain is fried after today, so I can't get into any big fundamental analysis on tomorrow's data... basically, the retail numbers should be crap. End of story on that one.

Am I still biased euro long? Of course, I have been for over a month and I'm not changing my bias now... I have not seen a single sign or signal in the market to cause me to change my bias at all whatsoever...

But, the longer we extend this bull run and the higher we go into unchartered territories, the more cautious and conservative I get when I add new euro longs...

One reason my caution is growing is because of what a central banker or what several central bankers could do about the crashing dollar and the skyrocketing euro... the more this exaggerated bull run is extended the higher the probability that we get some type of intervention in the market... just something to keep in mind...

For the past two days I've cautioned about some "interesting" things happening during the early European/London/NY sessions and I have to give the same cautions again... we may see some ranging during most of Tokyo, but that could all change after 0400 EST tomorrow morning...

Trade Team Update

These are the types of day I live for as a trader... tons of money making opportunities, tons of volatility, tons of liquidity, tons of banks triggering stoplosses which helps our entries, and lots of general mayhem in the markets...

There are two very exact and specific reasons why the euro jumped up to make a new all-time high at 1.5497 and then why we dropped from 1.5497 to 1.5281... both reasons are fundamental in nature and stemmed from the ECB and the Fed.

Early this morning our good friend Axel Weber from the ECB basically told the markets that the ECB is not cutting rates, bottomline. That's all the market needed to hear to send the euro to the moon -- remember, interest rates, interest rate policy, and interest rate futures are the #1 key drivers of this market...

OK, so a few hours later, Ben Bernanke comes out with this great plan to offer $200 billion to banks in exchange for just about any type of security that they could throw at the Fed... the Fed said they'd even take worthless and risky mortgage backed securities as collateral... this was the Fed's way of easing the credit crisis and liquidity crisis that has plagued the markets for months and months, despite steep rate cuts...

To break it down as simple as possible, you give the Fed securities, private or institutional, and they give you money... not money to lend to the general consumer, but money to lend to other banks... plus, the Fed said the banks could take 28-days to cover instead of the normal 24-hours, and they went as far as saying they would be willing to extend this program as need be...

This news immediately sent the market down for one very key and specific reason... you guessed it... INTEREST RATES! It's very simple, when the market saw this move they immediately got the idea that the Fed may not cut rates next week or may cut them by just 25bps...

Just yesterday Fed Funds Futures showed a 100% chance of a 75bps cut. As soon as this news hit the wires, there was no more 100% chance of a 75bps cut, it was gone, and the banks responded to those interest rate futures by taking the market down...

EUR/USD:

So, we got some really big news from the Fed. And I have to be honest and say that this type of plan is much better and much smarter than slashing and hacking up interest rates, it might, just might do something worthwhile and positive...

Overall it's not going to help our inflation issue, but it could turn out to be one of the more "dollar positive" moves the Fed has made in months.

First, let's talk about tomorrow's fundamentals... the two biggest pieces of data is French CPI and Crude Inventories... I believe we see very EUR+ CPI data out of France, there's no clear signs inflation is slowin in France.

The Crude data is key as oil continues to be on an unstoppable run the past few weeks... the legendary commodities trader Boone Pickens was all gung-ho about his big oil short a few weeks ago, but word is that his trade, which is reportedly massive, is down almost 15% and if oil goes any higher, he's going to have to do some serious short-covering... I don't think Mr. Pickens wants to see $110 oil but he just might soon...

Trade Team Update

Yesterday was certainly the calm before the storm! We've got a ton of stuff to cover in today's update...

First, we're going to look at what brought us to the doorstep of 1.5000 during the NY session, then we're going to look at what took us up and over 1.5000 right after NY closed and we'll accomplish this via a lesson I'd like to call "Stop Hunting 101," then we'll close with a brief interesting look at the euro/Dow correlation...

We moved a historic amount of pips bottom to top -- around 275 pips today, which is well above the average the euro would ever move in a single day... but the big push was fueled by the Fed and by the banks/brokers triggering stops, which we'll get to in a minute...

PPI and the Fed:

As we forecasted in yesterday's update, PPI came in very USD+, with a headline print of 1.0%, which far exceeded market expectations. Now, we did caution against taking any knee-jerk trades in reaction to the PPI number and I believe most heeded our advice...

There's a common trading "technique" to trade news events based on deviations of forecasted and actual numbers and I absolutely do not agree with that style of trading and honestly I think it's idiotic to trade that way as there are so many variables that cause the market to move and react and a single piece of data is no valid indicator to trade from... but, maybe we'll cover this more in detail another time...

So, the reason we cautioned against making a knee-jerk trade on PPI was the fact we had several Fed speakers today and we had tons more data due out which was forecasted to be USD-. Sure enough, both the Fed's Kohn and Poole completely ignored today's hot inflation data...

I have to be honest, there was a little part of me that truly thought the Fed would address today's PPI and throw at least a little bit of hawkish inflation rhetoric into the markets... we got no such rhetoric, in fact, the Fed ignored PPI and even went as far as to basically say there was no inflation issue and that there's no focus on inflation!

The market knows the Fed is flatout ignoring inflation and is likely going to cut rates another 50bps in March, so again, we have all the more reason to see the euro continue its bull run against the dollar...

What that did was just give the market the greenlight to hammer the dollar and boost the euro up and away towards the 1.5000 level, but failing before the market "closed" at 5:00 p.m. EST

And from stage left, enter the banks and brokers...

Stop Hunting 101:

Today in the chat and over the past few weeks, we indicated that should the market take the euro to 1.5000, that it would not stop there and turn around, but would likely move to 1.5050 to give the banks and brokers the opportunity to trigger stops and cause major stoplosses acrossed the board...

That is precisely what happened when we touched 1.5000... the banks and brokers triggered stops and this fueled the exaggerated move towards the 1.5050 level, before falling back...

Now to this day I still get traders that want to argue with me or don't want to believe that there's such a thing as stop hunting and stoploss triggering. I'm not going to use this post to discuss the value or stupidity of using stops, but rather to explain how this whole thing works with the hopes that more traders can eliminate getting stop hunted and can keep more of their profits...

Basically, all the brokers shove it down your throat that you must set tight stoplosses of 20 or 30 pips or at 00 and 50 levels, plus most tech traders use stops because they have no clue how this market really works and why it moves the way it does, plus all the big "gurus" beat traders over the head about placing tight stops, plus if you go into any FX chat room or message board (except ours) and you tell them you don't use stops you'll get ridiculed, beaten-up and bullied for not using stops... it's really ridiculous...

With the vast majority of retail traders using tech indicators, the same tech indicators, the vast majority are all setting stop losses within a few pips of each other all on the same key tech levels, so right off the bat, they are sitting ducks, in addition, the brokers can see those stops and they have computer algorithms to hunt those stops...

So, during times of low liquidity and during times when the big market players are out of the market, the banks and brokers work together to manipulate the market to move against those traders and to trigger those stops, it's very simple and easy for them to do...

Have you ever set a stop? Have you ever seen your stop get hit only to watch the market turn right around and go the opposite direction? If you answered yes to that, you were the victim of a stop hunt.

The other way traders get easily stop hunted is for the fact most set stops on round-number levels like 00, 20, 40, 50, etc. For example, suppose a trader uses some techs and they decide to set a stop 30 pips below a key Fib line (which is tremendously common) well, the brokers and banks know what those levels are and they know the mentality of the tech traders so they use low-liquidity opportunities to push the market past those key tech levels to knockout stops and then the market turns around and goes the opposite direction...

I could go into much more depth on this, but I think you should get the idea...

Stoploss triggering is similar to stophunting, but slightly different... lets use today's move from 1.5000 to 1.5049 as our example because that was a classic, textbook, run-of-the-mill stoploss trigger by the banks and brokers...

How did I know that the banks would trigger stops if we were to break the 1.5000 level? I can't see any stops and I'm not a broker, and I'm not psychic, but I knew this and warned about this way in advance because I know the mentality of traders and I knew there would be tons and tons of stops all over the place between 1.5010 and 1.5050...

On a stoploss triggering situation, when there are big stops placed with big money on the line, this just fuels the stoploss fire and that's when we see the kind of exaggerated and violent moves we saw today...

And surprise, surprise, when did this take place? Almost as soon as the NY traders went home, when the European and UK traders were sleeping, and before the Tokyo traders turned their computers on... it started right after 5:10 p.m. EST when the market was completely flat and there was almost zero liquidity...

That is the time of day that the banks and brokers will hunt stops and trigger stoplosses... it's tremendously easy for them to do, as we saw today right before our eyes... and just as we said, the market would return to the point from where it took off -- the market will almost always return to the point it takes off from because those moves are 100% stoploss triggers and 0% buying... if it was a move caused by buying, the market would not fall right back down again and return to point of take-off, but it did...

Simply look at a chart at 5:10 p.m. EST, follow the spike up to 1.5049, then follow its fall back to where it was at 5:10 p.m. EST -- I'm not into candlepatterns, but that is a straightup stoploss trigger pattern on your chart!

Again, I could go into more depth on the stop thing, but hopefully I've made my points clear and this is information you'll take into consideration if you decide to use stops in the future...

Tomorrow's Fundamentals:

Once again, we have a huge day tomorrow... will we move 275 pips? I can almost guarantee you that's not going to happen, but it doesn't mean we can't see some heightened volatility and price swings tomorrow...

I'm going to try to sum tomorrow up as quick as possible:

Durables and Core Durables: suck
New Home Sales: suck
Bernanke: suck, lies, dovish, suck
USD: suck

One thing I want to mention before we wrap up -- as you know, one of the market correlated variables we watch is the Dow. This doesn't make much sense to the bulk of the FX trading world, but it makes sense to me because it's a great indicator... check this out... the last time the euro made an all-time high, the Dow had made 3 straight days of higher highs and higher closes... well, the Dow has just made 3 straight days of higher highs and higher closes and once again the euro makes an all-time high... coincidence? Maybe, but I think otherwise...

Lastly, on Sunday's update we talked about the USD Index... well, support gave away and hit the next support level of 74.50 before bouncing back... there was a reason we urged you to watch the USD Index this week and that reason played out before our eyes today... I encourage you to watch it closely the rest of this week as it's another great indicator for the EUR/USD...

Trade Team Update

Today was what we call the calm before the storm... not a whole lot of volatility or liquidity in the market as the banks are likely waiting for bigger data tomorrow and throughout the rest of the week...

Just a few things to re-cap... the Dow made some more weird moves today which also helped keep the EUR/USD in standstill mode, plus the 10-year yield made a 12-point move to the topside, which was USD supportive against the EUR.

This morning's housing data came as no surprise at all -- some of the worst data since 1999... and the only reason we slightly beat expectations was because median home prices dropped from $207,000 to $201,000 month-over-month.

Homeowners are slashing prices to move inventories, and for reasons like that the dollar will not be able to gain on the euro with better than expected headline numbers -- and this is a valuable lesson of why we do not typically "trade the news" or trade a specific data number... we have to do things how the banks do them, which is dissect the data, break it down, look at all data points, and come to a proper conclusion and evalutation on a bigger picture scale...

Making a knee-jerk reaction to a number and making a knee-jerk trade based on a number or a deviation of a number is about one of the stupidest things you could do in this market... it's not always about the headline number and taking a trade off of that will just get you stuck in a dumb trade most of the time...

Some people who don't understand how we do things and how we trade the market accuse of just being "news traders." That couldn't be further from the truth -- being a fundamental trader is not the same thing as being a news trader -- not even remotely close, not even in the same ballpark or in the same universe...

Tomorrow's Fundamentals:

In case you hadn't noticed, tomorrow is a mega, massive fundamental day... lets take a look at the most important stuff for tomorrow...

First up to bat is German IFO -- IFO is incredibly important tomorrow because this data will show the overal sentiment and views from various businesses, manufacturers, retailers, construction companies, wholesalers, etc. in the Eurozone's largest and most important economy. We'll get to see if those firms are concerned about economic conditions in the Eurozone or if they have a peachy outlook on the future...

Based on some data we've seen the past few weeks, I believe we could see a bit of downside surprise with this IFO... specifically, Industrial production and output has slipped this year. Plus, German workers are demanding wage hikes. But what would be positive for the euro is if those firms are still freaking out about inflation, which is normally the case in Germany...

I can't predict exactly how the data will print, but based on my research, we should see the data come in softer than the previous month...

Next up to bat is PPI -- with inflation now just starting to come back into focus in the U.S., PPI will be incredibly important tomorrow... if producers and manufacturers are paying more for the materials they need to produce, those prices get based on to the consumer, and this price instability causes inflation, and inflation is GREAT for a currency!

It's my belief we could see USD+ PPI number print and possibly even a USD+ upward revision to last month's PPI number... again, I'm not in the business of making predictions, but based on my research of the markets and inflation specifically, if the truth is to be told tomorrow, PPI has to come in as expected or hotter than expected...

Next up to bat is Case-Shiller Price Index -- this is not so much of a market mover and will not come under too much scrutiny tomorrow, but it's a respected piece of data, so of course we need to watch it and analyze it... bottomline, it should show what we and the markets already know about the housing situation -- I do not expect any upside surprises on that one.

Next up to bat is Consumer Confidence -- is the consumer confident? Heck no. The consumer is not borrowing money and not putting goods on credit -- they are either maxed out or freaked out or put out...

Once again, based on what I see happening in the consumer and retail sector, there's really not much optimism or hope -- that being said, if we see something like an upside surprise with this data and a hot PPI print, I believe the USD could certainly get some love tomorrow...

Batting at the bottom of the order -- House Price Index, Richmond Fed, and Fed Kohn speaking... but, who really cares, we got PPI tomorrow!!!

Seriously though, Kohn is going to talk about economic conditions and possibly about monetary policy... so, prepare accordingly... the Fed has been bi-polar on growth and inflation...

EUR/USD Trading:

There's no real price action to gauge the market with, we're in too tight of a range... I'm headed into tomorrow's cavalcade of news by not taking on any new trades I can't get out of by the time Europe opens... practicing strict risk and money management for tomorrow...

I urge you not to get yourself into an overleveraged situation tomorrow -- there's a higher probability we could see heightened volatility and price swings, so trade smart should this play out in the markets...

Trade Team Update

As expected, Bernanke and the FOMC gave the markets an additional 50bps cut, dropping the Fed's key interest rate to a paltry 3.00%...

The market's first-wave, initial response was to drive the euro up 100 pips against the dollar, but as we indicated in our chat this afternoon, we'd then see a pullback and retracement of at least 50 pips, which has since materialized as we're sitting comfortably at the 1.4830 level...

There's just a few points I want to cover in today's update... some food for thought going forward...

Today's Fed action, in my opinion, will keep the USD under pressure in the near-term. In yesterday's update we discussed each possible scenario that could play out today and I won't take the time to re-hash as you can read yesterday's update if you like...

In addition, Fed Funds Futures is pricing in additional rate cuts in March,
possibly bringing the Fed's key interest rate as low as 2.25%!

So, what does this mean for the dollar? I'd like to use the CHF as an example of something I believe could play out should the Fed decide to keep cutting and cutting and cutting all the way down to 2.25% or lower...

For the past few years the Swiss have kept their key interest rate at or below the 2.50% level -- it was only last year that the SNB finally moved rates to where they currently sit at 2.75%, which is a major factor why the CHF has gained against the USD...

Now, when the Swiss kept rates hovering around the 2.00% to 2.50% levels, the markets beatup the CHF by using it as a funding currency and as a carry trade currency... the crazy thing about that is, Switzerland has always been a very fundamentally sound economy and very prosperous, with solid GDP and low unemployment rates, however, their artificially low interest rates took a damaging toll on the CHF... banks, investors, and traders used the CHF as a funding currency because Swiss rates were so low and it was cheap to borrow and cheap to repay...

These banks and investors would use cheap francs to invest in either higher yielding currencies and or higher yielding investments like equities, commodities, etc... you get the idea...

What I'm getting at is this -- should the Fed keep hacking interest rates, keep price fixing, and keep devaluing the dollar, I believe the USD could go the way the CHF went for the past few years, which is the USD being used as a funding or carry trade currency...

Think about it... these are some scary and current interest rate differentials:

USD and AUD -- 375bps in favor of the AUD
USD and NZD -- 525bps in favor of the NZD
USD and EUR -- 100bps in favor of the EUR
USD and GBP -- 250bps in favor of the GBP
USD and CHF -- 25bps in favor of the USD

In this market, the money flows to where there is a higher rate of return and right now, there are many other places to get a higher rate of return...

Now, I'm not making any predictions that the dollar is going to turn into a carry traded currency, but I truly believe this is a real potential should the Fed keep on this super rate cut cycle... with those interest rate differentials as they are presently, why would the banks buy up dollars, especially if the Fed is just going to keep going lower with rates? Maybe I'm thinking too logically here, but it just wouldn't make any sense to say buy dollars and sell-off Aussies when there's a 375bps interest rate differential...

Moving on...

Today's action left some traders scratching their heads, wondering why the euro couldn't sustain a break above the 1.4900 level... well, please keep in mind we have a mega fundamental release -- NFP.

Now that the banks have gotten today's FOMC out of the way, the next hurdle before we make any bigger, extended moves is Friday's NFP... I believe the banks are formulating a gameplan and are likely saving their heaviest firepower for Friday... in addition to NFP, there's likely an option expiry on Friday morning, after NFP, at the option barrier of 1.5000...

We'll talk more about NFP tomorrow and as we run-up to the data release... but as far as trading goes, it's the same old story I've been saying for the past two weeks... I'm staying euro long at this point -- cautiously long -- playing the market tight on the intraday, and keeping my best euro longs from the 4385 to 4658 level open at this point on a swing basis...

We could certainly see some more retracement between the 0300 and 0700 EST timeframes as the market may want to allow the euro to correct a bit, then buyers will re-emerge to pickup better entries...

Can we go to 1.5000? At this point, I believe it's possible... I have to imagine there are some big stop sets between 1.5000 and 1.5020, and experience tells me the banks and brokers will do what they can to run stops and trigger stops... that being said, let me repeat that I'm playing the intraday cautiosly long and certainly not loading the boat and blindly expecting 1.5000 to show up on our doorsteps by Friday...

As always, please practice smart and strict risk/money management the rest of this week... keep your margin in check...

Today's price action for the euro was correlated to the Dow, gold, and oil, so let's keep our eyes on those market correlated variables as we trade tomorrow... fundamentally, we have another huge day tomorrow, so please prepare accordingly... bear in mind, as we said, the market may be holding it's heaviest fire power for Friday...

Lastly, if you're a yen trader, stay strapped in because your rollercoaster ride from hell could just be getting warmed up in the near-term...

Trade Team Update

Because of the Fed's emergency rate cut last week, the market analysts and economists have been thrown for a loop as to what Bernanke will pull out of his bag of tricks tomorrow... I will not offer any speculations on what Bernanke will do, but I've been preparing accordingly and have tried to position my accounts for the "worst case scenario."

Now, the "worst case scenario" can certainly carry different meanings to different traders, but to me, whatever the Fed does tomorrow is the worst case scenario, of which I see three worst case scenarios... so, lets take a look at each one...

And just as an aside... you might be wondering why I have three possible worst case scenarios... well, as a trader, economist, and a taxpaying U.S. citizen, the only best case scenario for the U.S. economic situation is for the Fed to begin raising rates, for the gov't to begin reducing the deficit, and for our trade balance to shrink and our GDP to expand, but this is a different conversation for a different time...

Worst case scenario #1:

25bps interest rate cut -- a cut of just 25bps would be just half of what the market is forecasting, and this would be slightly shocking to all markets, including our market... the equities market will likely take a hit and not only see stock sell-offs, but would also see less money flow into stocks, which would turn the USD supportive against the EUR. I think the dollar would actually gain some ground back on the EUR should the Fed only cut by 25bps.

Worst case scenario #2:

50bps interest rate cut -- all markets are forecasting and expecting a full 50bps cut from the Fed. Should the Fed come through with what the markets want and expect, I believe the equities markets all around the world would react very favoribly to this move, more specifically, the Dow and S & P would respond with upward gains and momentum, which would then correlate into the EUR gaining against the USD. In addition, should the Fed cut by 50bps, the interest rate differentials would then turn into 100bps in favor of the euro vs. the dollar... this cut would bring the Fed's rate to 3.00% against the ECB's rate of 4.00%... I think it's quite significant to have a full 100bps interest rate differential between the EUR and the USD...

As you know, bank money flows to the nation that offers the higher rate of return, so I believe would could see renewed upward momentum and upward gains for the euro vs. the dollar. I really cannot imagine why banks would buy up dollars and sell-off euros with a 100bps interest rate differential... of course, we can't always depend on logic in the spot FX market, but the Eurozone now offers a better rate of return and it actually pays to hold euro longs, which is something traders look upon with favor.

Worst case scenario #3:

No interest rate cut -- yes, I absolutely believe there's a reasonable probability that the Fed will keep rates on hold tomorrow. I think it's a distinct possibility because of the emergency actions the Fed took last week... Bernanke's move, in my mind, diminishes some of the need to hack up rates any further tomorrow...

I believe a no cut would be tremendously supportive of the dollar vs. the euro... you see, concensus continues to grow that the ECB will eventually have to cut rates later this year and I am one of those that feels this way... M3 money supply is falling in the Eurozone and that will put less inflation pressure on the ECB... plus, I think we'll see the Eurozone's CPI come down from the highs of 3.1%, but lets not get off track here...

Should Bernanke hold rates steady, this would be a tremendous shock to all markets... our market does not handle shocking interest rate policy with any degree of emotional stability... a no cut could easily send the EUR/USD falling back to support levels between 1.45 and 1.43 in the near-term...

If the Fed were to hold rates tomorrow, global equity indicies would take a hit and I think we'd see some intense sell-offs and losses, which would naturally lead to the euro dropping against the dollar, due to the correlation between the EUR/USD, the Dow, the S&P/500, the S&P/500 and Dow futures, and the EUR/JPY (yes, the connection can run that deep). Then, we'd see traders begin to liquidate gold and oil positions, and possibly take short positions on those commodities to catch the down move, and those short positions in gold and oil would basically equate to taking long USD positions, which would then correlate into more USD support vs. the EUR...

A no cut would lead to some big, nasty crap hitting the fan in all markets, and ultimately I could see the dollar coming out of this smelling like a rose...

Fed psychology:

First, there's quite a bit of speculation that Bernanke made a knee-jerk reaction to last week's global equities sell-off, which was triggered by the nutjob trader from SocGen in France. So, to save face on his move to do an emergency rate cut Bernanke could certainly give the markets the 50bps cut they want, and this would be his way of saying, "last week's cut had nothing to do with the equities issues."

If Bernanke wants to send the markets the message that his biggest concerns are the U.S. economic situation and the issues within the credit markets and with the bond insurers/bond rating agencies, the FOMC will likely "vote" in favor of the 50bps cut. Of course, that cut will do zero to stimulate the economy nor will it offer much relief to the credit market and the banks, again, that's another issue for another time... but at least it would help Bernanke and the Fed save some face...

A 25bps cut or a no-cut could and probably would send our market the message that the Fed is growing more and more concerned with U.S. inflation and less concerned about what's happening on Wall St. This perceived concern about inflation would be very supportive of the dollar vs. the euro. You see, much of the euro's strength against the dollar is due to the fact that the ECB is so hell-bent on keeping inflation under 2%, which equates to tight monetary policy and hawkishness on interest rate policy...

The Fed and the ECB operate on opposite ends of the spectrum... Bernanke and his henchmen at the Fed are nothing more than subservient slaves to Wall St. and the trillion-dollar banking conglomerate that basically control governments and world markets, and because the U.S. still has the most powerful influence over the global markets and global economies, the subservient slaves at the Fed must do two things:

1. Manipulate markets
2. Price fix

Market manipulation and price fixing is accomplished through the Fed's monetary policy... if you want a good example of what price fixing is, look at what happened when Bernanke cut rates by 75bps last week... that move "fixed" prices on all of the equities markets and kept them from continuing to sell-off... I could give hundreds of examples, but you get the idea...

Now, the ECB has a totally different mission and mandate, which is ensuring price stability -- Trichet is almost to the point of being neurotic when it comes to inflation and price stability, but you have to understand why... the German Bundesbank is very influential, and Europeans, especially Germans still remember the days of having to cart in heaps of cash to buy milk and bread... so because the ECB is coming from that angle, they are naturally going to be very tight on monetary policy and less likely to ease on rates even when growth begins to suffer, which is and will be the case this year... so as I said earlier, this is one of the main reasons why the euro has been so strong against the dollar for the past few years...

EUR/USD trading:

All possible scenarios for what could happen are stated above... now, how this translates into trading is a different story because no one truly knows what the Fed is going to slap us with tomorrow...

On last Friday's and this Sunday's updates, we gave the key level, on the downside of 4680 - 4660... it hit 4660 right on the dot on Sunday and has since move towards the top of the range, but unable to breach the 4800 level...

Clearly the market has fallen into a "wait and see" trading range because the banks are speculating just as much as the rest of us and will likely need to see what the Fed decides tomorrow...

It would not surprise me to see some movement out of this range as we draw closer to tomorrow's decision... don't forget that we have key GDP data tomorrow morning, plus, some banks may try to square positions ahead of the FOMC decision and these money flows could cause some movement...

As far as trading goes, I grabbed a 4794 euro short yesterday and will certainly hold this trade, unless of course the market moves against me, in which case the trade will be closed for +1 pips and I may look to re-enter short at a higher position...

On the long side, I am still long from 4385 and will hold all longs that are still in profit below the 4700 level... other than that, I've spent this week trying to flatten out and free up margin just to protect against the unknowns... this is not a situation where I really want to get caught going the wrong way because tomorrow could be monumental...

I'd really like to grab some better euro shorts should the market go up and give an opportunity to do so... as mentioned above, I think in the end of all this the dollar could come out smelling like a rose, even though fundamentally and logically it shouldn't be that way...

I encourage you to do your own analysis of the market and weigh each possibility against the other... I could be way out in left field, but I wanted to at least give you my view on things...