Let's discuss trading EURUSD (Euros against US Dollars).

Dollar: Will The Rally Continue 1.50?

The greenback put up its best week in 3 years rallying nearly 5 big figures in five days as market expectations regarding US interest rates changed dramatically. As we noted in our special report Fed Rate Hike Ready or Not  regarding Chairman Bernanke uber hawkish remarks last week, “This was a tremendous change in tone from the Fed Chairman who for the past 18 months has spent most of his energy combating the negative economic effects of the housing bust and the credit crunch by methodically lowering rates from 5.25% to 2.00%. Clearly the game has changed and the Fed now felt that inflation was a bigger problem than growth for the US economy.”

Inflation of course is being driven by oil and the Fed has taken square aim at crude by suggesting that US monetary policy will become restrictive in order to retrain the rising prices of petroleum.  This week-end’s G-8 meeting addressed the same issue with member nations providing a strongly worded communiqué asking oil producers to put out more product.  In response reports out of Saudi Arabia indicate that the swing OPEC state has agreed to pump out  an extra 500K/bbl per day. If that report proves true and manages to push oil process below $130/bbl the greenback should strengthen further at the start of trade next week.  G-8 however, shied away from any overt language regarding exchange rates, leaving US Secretary of Treasury Paulson to simply reiterate the well worn mantra that US is committed to a strong dollar. 

Next week the calendar contains only 2nd tier economic data with only PPI release having much of an impact on the market. In short, the macro factors that drove trade last week as likely to continue to play an important part this week with all eyes focused on oil prices. The greenback had a powerful change of turn last week and unless US data produces major negative surprises in the smattering of Industrial gauges due this week, the path of least resistance in the EURUSD appear to be down.  -BS

From:DailyFX

The Federal Reserve left interest rates unchanged at 2 percent and upgraded their degree of hawkishness but unfortunately for dollar bulls, the Fed was not hawkish enough  What currency traders came to realize was that even though the Fed could still raise interest rates in September, the ECB will beat them to them punch. Federal Reserve members are in no rush to show their cards because time is on their side. With 2 non-farm payrolls and multiple inflation reports before the next Fed meeting, the US central bank will get a much better sense of whether US consumers and businesses can handle a rate hike. In the meantime the dollar may continue to let off some steam, particularly against the Euro. Non-farm payrolls and the European Central Bank meeting are both scheduled for the same day next week, which could give us two reasons to sell the US dollar. However any further weakness should just be a bump in the road for the US dollar because the ECB has already forewarned the markets that the July rate hike may be one-off. Therefore the focus will shift back to the Federal Reserve, whose next move will be a rate hike. If inflation refuses to ease over the next few months, the Fed may be forced to tighten monetary policy more than once. In that case, they could be perceived as more hawkish than the ECB, which would help the dollar recover. This is of course assumes that economic conditions do not get progressively worse over the next 2 months and inflation does not suddenly drop. Durable goods orders and new home sales elicited nothing more than a yawn as both numbers came out very close to expectations. The final figures for first quarter GDP, jobless claims and existing home sales are due for release tomorrow. All three pieces of data are expected to be dollar bullish with GDP predicted to be revised higher and existing home sales expected to rebound.

From: DailyFX