Daily Forex Analysis

Today’s US Dollar Trading

• Financial crisis intensifies as Lehman fails
• More bailouts on the table
• Volumes dry up after the open

Overnight Preview

• Look for continued volatility
• USD to weaken further

Looking Ahead to Tuesday
All times EASTERN (-4 GMT)
• 8:30am USD Core CPI m/m
• 8:30am USD CPI m/m
• 9:00am USD TIC Net Long-Term Transactions
• 10:00am USD Treasury Sec Paulson Speaks
• 1:00pm USD NAHB Housing Market Index
• 2:15pm USD FOMC Statement
• 2:15pm USD Federal Funds Rate

Summary
It’s been a wild ride in the markets today from anyone’s perspective; most notably the equities meltdown on Wall Street thanks to the panic surrounding the failure of Lehman Bros. and the potential failure of the insurance giant AIG. Speculation is raging with the “too big to fail” mentality so my question is “Why is the Fed involved?” Forex trader’s note that almost lost in the day’s action is Oil dropping below the psychological $100/BBL price level to finish the day in the $95 handle. Although most analysts agree a price fall in Oil is welcome the jury is still out as to how much this represents a panic liquidation by traders to meet financial obligations elsewhere or just outright fear by the longs. In the case of the USD, the Greenback has suffered huge volatility the past 24 hours and more is expected as the closed-door negotiations continue on possible bail-out options available for the financial markets. To end the day the USD is mixed, marginally higher against GBP and EURO while ending lower against Yen and Swissy. Traders note that after the initial panic long-liquidation seen overnight Asia the USD stabilized and traded within tight ranges during New York. Also noted were the lighter volumes and patchy order flows as stops were cleared both ways intra-day leaving traders willing to sit on their hands until more data is known. GBP traded to a high print at 1.8130 overnight before dropping to trade the 1.7900 handle for most of the day; cross spreading for EURO and Yen was heavy and the GBP will likely see more whipsaw near-term. EURO also rallied hard in Asia for a high print at 1.4482 before falling back as well; ending the day around the 1.4200 handle after posting lows in New York at 1.4083 as the opening panic continued to spook traders. For the most part, the speculation that the Fed will need to cut rates unexpectedly tomorrow helped hold the USD on the softer side as late longs bailed during early Monday’s trade. In my view, today’s market environment and near-term volatility is a once-in-25-year event. Wise traders will make use of this volatility carefully but if the continuing financial crisis continues to unfold with the current level of panic the fortunes of the USD do not look bullish in my view. Look to buy dips in the GBP and the EURO the next day or so as the Greenback will likely continue to fall; most likely hard against the Yen in my view.


GBP/USD Daily

Resistance 3: 1.8200/10
Resistance 2: 1.8130
Resistance 1: 1.8080
Latest New York: 1.7993
Support 1: 1.7760
Support 2: 1.7620/30
Support 3: 1.7580

Comments
Rate explodes to the upside and runs all bids out; falls back to open lower in New York. Buy dips is the preferred strategy in my view. Cross spreaders seen active on the sell side but volumes lighter. Rate two-way but firm on dips; traders note bids still absorbing offers on the breaks. Traders note stops mixed with offers above the market also. Major support has held last Friday, any weakness likely to be bought hard. Profit-taking bids continue as well. Hook reversal from the toolbox still valid. Price drop today likely over-extended on sympathy selling from EURO. Drop is drawing profit-taking bids suggesting the bottom is finally trying to form near-term. Short-covering rally may be over due to sharpness of the move. Likely an exhaustion drop. Close back above the 1.7780 area needed to take some of the pressure off.

Data due Tuesday: All times EASTERN (-4 GMT)
4:30am GBP CPI y/y
4:30am GBP Core CPI y/y
4:30am GBP DCLG HPI y/y
4:30am GBP RPI y/y
Tentative GBP BOE Inflation Letter


EURO/USD Daily

Resistance 3: 1.4550
Resistance 2: 1.4380
Resistance 1: 1.4250
Latest New York: 1.4293
Support 1: 1.4080
Support 2: 1.4000/10
Support 3: 1.3940/50

Comments
Rate rallies hard, some sympathy trade from GBP; lows likely in finally from last week. Bids are supporting on dips. Bounce out of the drop on better volume traders say, lots of stops from shorts seen overnight as well as panic bids. Two-way trade and whipsaw result in increased volatility. Stops Friday suggesting bottom-picking is still being tried by early longs. Traders report offers in size being absorbed. Traders suggesting that the rate is trading technically. Market is continues heavily short now so expect a further leg higher. Rate continues to track Cable and vice-versa. Now that more stops are cleared a rotation higher is even more likely. US data this week likely to be unfriendly so be ready for more whipsaw.

Data due Tuesday: All times EASTERN (-4 GMT)
2:00am EUR German Final CPI m/m
5:00am EUR CPI y/y
5:00am EUR ZEW Economic Sentiment
5:00am EUR Core CPI y/y
5:00am EUR German ZEW Economic Sentiment

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