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Daily Fx EUR/USD, GBP/USD Commentary May 25, 2012

May 25
03:31 2012

The EUR/USD seems to me prepering for the next phase lower as we see here on the 1 hour chart it looks like the Smart money induced the selling only to reverse and push price up to take the stops of those sellers and getting ready for the drop. They wont do it until the orders are stacked in their favor so there may be another push to the upside to try and push out any weak holders before the next cycle to the downside and will most likely be working to test the lows from June 2010 at 1.2167 after a brief hesitation at the break out level at 1.2470. There should be opportunities to make smaller profits as they try and push out the weak holders but if a position is to be held for a longer term it will be a short for me. I did manage to catch the short yesterday with 2 positions and they both git hit at break even when the market retraced before the US session open.

The GBP/USD is looking pretty much the same with the push down then stop run to the highs. The fact is that it has been held up somewhat better with the EUR/GBP weakness and is setting on what looks to be some good daily support at 1.5637 where it did manage the bounce yesterday. I have my doubts this will actually turn the market by there will be some manipulation as they manipulate the buyers that are surely there and let them believe the market will turn and eventually turn and hit their stops. The process may already be in the works as we see the bounce with the pin bar on the hourly chart below. Then the push up to take stops above the Asian range and the finish of the day closer to the lows. There will probably be a manipulation up before any push lower but thats not a guarantee.

Forex News Today

Scheduled news today is slow and there isnt much worth mentioning but here is a list.  GfK German Consumer Climate, Swiss Employment Level, Italian Retail Sales, Revised UoM Consumer Sentiment. None of these are high impact events and I expect the market to be pushed around by tape bombs today. The big one being the rumors of the concerted intervention of Central Banks around the world. So lets poke at this a bit.

I do believe that there eventually will be some sort of concerted effort. However the size and shape of such effort is in question. Before I thought it would be pretty much every Central Bank involved but I have seen some recent information that brings that in question. Starting with the US.

First of all the prospect on more QE is politically toxic and has a very slim chance of being done before the Presidential elections. A concerted event does have a better chance but I have to ask my self about what was the US role in the last one. They opened up the currency swap lines correct? Well those swap lines are still open today so what more can they do besides print? This is what my favorite gloom and doomer Graham Summers thinks.

The Federal Reserve cannot step in. I know the blogosphere is rife with claims that the Fed will just print and print and print to save the day. The people writing these claims fail to see that:

 The Federal Reserve cannot step in. I know the blogosphere is rife with claims that the Fed will just print and print and print to save the day. The people writing these claims fail to see that:

  1. The last time the Fed printed (just $600 billion at that) food prices hit all time records and revolutions erupted around the world.
  2. Back home in the US the Fed came under massive political pressure forcing it to go on damage control mode (Bernanke’s town hall meetings and opening the Fed to Q&A sessions)
  3. This is an election year. The Fed has done all it can to support Obama’s re-election (for good reasons: Obama re-elected Bernanke and the GOP is targeting the Fed as a major issue). If the Fed launched some massive printing campaign, Obama will certainly lose.
Ok so that seems unlikely so what about the ECB? Will they give Germany the middle finger and print away? Or will Germany actually suck it up and let them? Doubtful. Here is Grahams take.
 The ECB is tapped out. Having provided over €1 trillion in funding via LTRO 1 and LTRO 2, taking on over €700 billion in PIIGS debt putting its own solvency at risk, it simply cannot launch another LTRO scheme for the following reasons:

  1. Those banks accepting LTRO funding are being punished by the market, thereby indicating that ECB funding is no financially toxic to a firm’s reputation in the market place
  2. The positive effects of LTRO 2 lasted only one month compared to several months for LTRO 1. Thus, we find that with each additional intervention the benefits are shorter lasting.
Germany is politically fed up and monetarily tapped out:

  1. Merkel’s political party is getting destroyed in state elections due to her support of the EU. And Merkel is running for re-election in 2013.
  2. Merkel is committing political suicide by continuing to put Germany on the hook for Europe’s problems. Speaking of which…
  3. Germany is already on the hook for over €1 trillion in EU losses… and the ECB has made it so that it can roll the losses from its PIIGS portfolio back onto National Central Banks (AKA the Bundesbank).
  4. Inflation is showing up in Germany and becoming a political issue: see recent union demands (and success) for pay raises.
  5. The German constitution does not permit the creation of Eurobonds.
  6. If Germany permits additional bailouts or funding it will lose its AAA rating, leaving Europe without an AAA rated large economy to fall back on.
OOPs that kills the idea Germany will support anything

Ok so what about the IMF?

Well when we talk about the IMF we are really talking about the US and they have already denied the IMF on requests to bulk up the fund for bailing out Europe so that seems like a moot point.

Well how about China coming to the rescue?
They have said it so many times and it is in their best interests since Europe is their second largest buyer of Chinese goods right? I will refer this to Graham and check out the clip from Charles Biederman on the real state of the Chinese economy.

China cannot be a savior:

  1. Having pumped its system full of liquidity it now faces inflation at the same time as its economy is slowing. This in turn means…
  2. That China’s Government is starting to lose its already tenuous control of the populace. As a result…
  3. China will be focusing on domestic issues rather than saving Europe (when was the last time the “China to back the EU” story appeared in the media?)

With all this in mind it doesnt surprise me that the rumors of the concerted intervention are swirling. How else with they get buyers in the market to sell to when there simply aren’t any. They have to promote some optimism for the continuing of the status quo of propping up the stock market but it sure looks like they actually may have run out of ammo and hollow words are all they may have left.

Having said that when the whole thing starts down the proverbial toilet common sense tells me they will do something but what remains a mystery to me right now. Things are about to get really interesting and I truly think that we are going to make a killing following the Smart Money as they slide down the crapper. Things are about to get really interesting my friends.

Happy Trading


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