Focus is on the FOMC meeting

Forex News

by Angelo Airaghi [Guest Analyst]

The Federal Reserve meets Tuesday and Wednesday. The decision to cut rates by 25 basis points to 4.50% is only a matter of time with October and December sharing a 50/50 chance. The U.S., whose trend stays bearish for now, is reaching important support levels against the European currency.

Fed decision is only a matter of time

Housing slump continues in the United States. In September, existing home sales declined 8% month over month, following August¡¦s fall of 4.7%. The drop was broad based among condominiums (-4.3%) and family homes (-8.6%). Inventories, on the other hand, moved up a tiny 0.4%, while the month¡¦s supply of unsold homes jumped to 10.5 from August¡¦s 9.6 months, the largest increase of the past eight years. New home sales rose instead 4.8% (-2.5% expected) in September, but the previous month was revised down to 735,000 units from 795,000 units. In the West sales increased 37.7%, while in the Midwest they decreased 19.5%. The month of supply remains above the median level of six months, but it declined to 8.3 months from 9 months. With housing decline unfolding, and the stock market stalling, consumer spending might contract in the last part of 2007. The Federal Reserve is expected to cut rates again by 25 basis points to 4.50% by year end with October and December sharing a 50/50 chance.

U.S. consumer confidence might contract further

In effect, September¡¦s durable goods orders softened 1.7% (1.5% expected) after declining 5.3% in August. Excluding transportation, orders increased 0.3% versus August¡¦s decline of 1.8%. Core orders, non defence capital goods orders excluding aircraft (an indicator of future activity), moved up 0.4% in September after falling 0.1% in August. Orders have rose 8.2% annualized in the third quarter compared to the 15.1% shown in the second quarter. Core orders moved up only 1.4% annualized compared to the increase of 13% showed in the second quarter of 2007. The University of Michigan survey final reading moved down to 80.9 (82.0 expected) in October, from September¡¦s 83.4, the lowest level since October 2006. The expectations index fell to 70.1 from 74.1, while the current conditions index declined to 97.6 from 97.9. Inflations forecasts over one year stayed unchanged at 3.1% and it decreased over the five years period.

In Europe, growth remains a priority

In Germany, the economy appears to have reached an intermediate top. In fact, consumers are more concerned about the future, as inflation remains a menace and the strong euro might reduce exports. In October, the IFO business climate index, which is calculated over 7000 businesses, fell for the sixth consecutive month to 103.9 from September 104.2. The numbers matched expectations, but the services industry has clearly lost some ground. Current assessment printed 109.6 from September 109.9. Expectations was 98.6 from 98.7. Finally, in November, the Gfk consumer climate index for Germany is expected to decline 4.9 points from 6.7 points in October. The European Central Bank will probably leave rates unchanged for now, so to better understand actual economic performance. Growth is a priority, but inflation might again pick up in the next months, following the cyclical bull trend in all commodity markets.

Euro and BPound are testing resistance

The medium/long term trends are still pointing upward for European currency against the U.S. dollar. However, the 1.43/1.44 level is at the conjunction of various resistance lines that might represent a strong technical barrier and cyclical components are switching from positive to neutral/negative for the European currency. A strong move above 1.4480 is necessary to lift the Euro to 1.4560, 1.48. The long term upper channel line that started in 2006 is acting as an important support level, although only a move below 1.3925 would possibly mark the end of current uptrend. In that case, a decline to 1.3820/1.3750 is possible.

The British Pound is again testing the important resistance level at 2.0480/2.0550. This area is at the conjunction of both a long term trendline and the high Bollinger band and is acting as a strong barrier. A move above 2.0580 is necessary to target 2.0630/50, eventually 2.08, provide its price will not decline again below 2.0440. The British Pound is entering into an area of strong technical and cyclical resistance as well.

Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.