Now that the Federal Reserve has lowered the Fed Funds rate to 2%, currency pairs will be adjusting to a new set of expectations. In forex, money always seeks to gain an edge by resting in currencies that pay a differential in rates. It is a constant search for yield. With the U.S. dollar at 2%, there are still strong bearish dollar forces in the form of higher yielding currencies. But a countervailing force is that of expectations. The highly questionable expectation that the credit crisis has peaked and commodities have topped offers a respite for the dollar. This may be psychological with dollar weakness resuming its downward path when discouraging U.S. economic news makes a rally no longer justified. Yet if traders can't figure out where the U.S. economy is going, they simply can look elsewhere and there is a geometry of opportunity being shaped in the EUR/JPY, AUD/USD and NZD/USD. Let's take a look. The EUR/JPY has experienced a 1,000 pip move and traders who have missed the move up can very well catch the move down. The price action also follows a fundamental vector, which is a slowing down of the European economy. When economic data shows a slowdown, currencies use that data as leading indicators. If a slowdown is anticipated in the eurozone, then the euro's weakness will make it difficult for the EUR/JPY pair to have the momentum to remain at previous highs in the 166+ range. A EUR/JPY correction is in the cards and it could be 1,000 pips.
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