Review of FOREX 10.03.08
March 9th, 2008

USD

Over the last week, USD fell against major currencies. The decline started from the middle of the week and continued until the middle of Friday, when after reaching new absolute maximums fixing of positions started and USD completed the last day in growth.

Among the fundamental data, which have had an impact on the American currency decline, it is worth to mention Beige Book, which showed that from the beginning of the year, economic growth has slowed down, and growth in economic activity declined in more than half the regions.

In the Beige Book noted continuation of price declines in the housing market. Sales of homes fell sharply in Boston, Minneapolis, Richmond and St. Louis. Prices continued to fall, because stocks remained at a high level.

Activity in the retail sector has been weak or slowed, in particular the weakness observed in the sales of automobiles.

Mixed signals received from the commercial real estate sector. Almost all regions have reported pressure from the prices of raw materials and energy, but wage growth was moderate.

U.S. authorities are still saying that they want a strong dollar, but otherwise they would say the same. The head of the European Central Bank, Jean-Claude Trichet said in his statement that he did not give guarantees for promises their American colleagues. This statement could mean that the American currency will continue to remain above the level of 1.5 against the European currency for few months, more precisely, until the moment becomes clear that the United States have outlived a recession after which a strong correction will occur.

EUR

EUR/USD updated its absolute maximum, in an area of which continues to be at present. Negative information from the United States, as well as increased inflation in the euro contributed to the growth of a pair to new maximums, which no longer correspond to any fundamental data.

Nevertheless, this situation can not occur for good. As soon as from the U.S. data begin to arrive that the recession is minor (expected that the growth rate in July reached the bottom), all will reconsider a position on the American economy, which would strengthen the dollar.

The European economy will complete the fight against inflation very soon. Despite the fact that now the threats of inflationary growth are strong enough (against the background of increase in the prices of food and raw materials) September is likely to reach a comfortable level of inflation range so that it ill lead to reducing the rate of the European currency.

At present EUR/USD is located in the area of their maximums. The closest significant level of resistance is at around 1.56, and the nearest target level, which will have significant support pair EUR/USD is 1.46 (closing this year, coinciding with the closing of a second three-year cycle) (see chart).

It is expected that after reaching the area 1.55-1.56, the pair finds absolute maximums in the area where price will not appear within 7-10 years.

In the current situation it is difficult to recommend the opening of long-term short positions on any specific levels (all will depend on the size of recession and inflation in the euro), but, in my opinion, this will happen in a month - two, when it becomes more clearly about size of recession. In this situation the 1.56 mark looks good protection stop orders and the level of 1.46 looks like the nearest target.
the source of info: PoltekFX Analytics