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With much of Asia enjoying the New Years holiday, FX price action was limited and volumes low. Other than the ECB rate announcement and subsequent press conference, traders have been focused on weather patterns in the Southern hemisphere and escalating protests in Egypt.

Cyclone Yasi hit Australia’s Queensland coast, prompting lots of great news footage but limited lasting damage before being downgraded to a measly category-2. While total damage is still unknown, we are hearing that local miners are already preparing to go back to work suggesting that extended suspension of the Australian commodity industry is unlikely. This is good news for the AUD bulls (and regional Asian, inflation worried central bankers) as the limited effect on growth will keep the RBA focused on the mid and longer term; not short term disruptions in growth or inflation trends. The pre-cyclone selling has quickly worn off as tomorrow’s monetary policy statement (MPS) will be released and we believe that the markets are overly dovish in their positioning considering the expected CPI forecasts – watch for another push above 1.0150. Full article…

If you’re like me, you’ve been watching the events in Egypt unfold over the past few days.   I’ve been following reports closely on TV and online as I feel that this is an historical event that can have massive effects on the world.   If you don’t know what I’m talking about, here’s a brief summary: After 30 years of tyrannical rule by Hosni Mubarak, it seems that the Egyptian people have had enough. They’ve been flooding the streets in their thousands, demanding that Mubarak step down and allow for open and free elections. So far, he has refused to comply.   The result is chaos in Egypt, one of the most important countries in the Middle East. The future is uncertain: some hope that democracy will be born and stability restored and others fear that a new tyrant will emerge, this one more warlike than Mubarak and lead the region into worse times.   There are many reasons why you should care about this, but as this is a Forex site, let’s focus on the two things that may happen in the case of the US Dollar.   Option #1 – Fear grows, the Dollar Rises   The Us Dollar has long been a safe-haven currency.

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The last few years have been volatile for the British Pound. In 2007, it touched a 26-year high against the US Dollar, before falling to a 24-year low a little more than one year later. During the throes of the credit crisis, analysts predicted that it would drop all the way to parity. Alas, it has since managed to claw back a substantial portion of its losses, and finished 2010 close to where it started.

At the moment, however, there are two contradictory forces tugging at the Pound, which could send up upwards against the Euro but lower against the US Dollar. The first is the sovereign debt crisis in the EU, which flared up dramatically in 2010 and currently threatens to crippled the Euro. I will offer more commentary on this issue in a later post; for now, I just want to point out its role in supporting the Pound. While the Dollar is the Euro’s chief rival, many traders have turned to the Pound (and the Swiss Franc) because of their regional proximity.

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The World Economic Forum is going on in Davos, and many key players are still concerned about what is happening in the euro zone. Indeed, concerns are that sovereign debt problems may not be fixed by bailouts. However, French president Sarkozy insists that turning away from the euro is not option.

And, even with the rumblings today, the euro is still higher in forex trading against the U.S. dollar. The greenback is showing weakness today, thanks to uncertainty over coming economic data. Additionally, the news that jobless claims increased is shaking things up a bit for the greenback. Plus, with the Japanese downgrade, speculation is that the U.S. could be next.

Even though the euro is doing well today in forex trading on the currency market, it doesn’t mean that it will remain so. Continued sovereign debt problems could send the euro lower again, or concern about economic recovery could send forex traders to the U.S. dollar for save haven.

A round of second tier data has been pushing the low volume Forex markets around, providing little in terms of directional indications. Traders are still debating the meaning and longevity of yesterday’s S&P downgrade of Japan’s long-term sovereign debt; the rating was demoted one notch to AA- and the outlook for the rating was considered as “stable”. The usual reasons for the rating cut have been cited as weak growth, shifting demographics, deflation threat and political ineptitude that will hinder any progress on addressing the country’s ballooning debt. This most recent downgrade comes after a string of credit rating adjustments; most recently Moody’s cut to Aa2 in May 18 2009. There seems a general malaise surrounding the meaning of the downgrade by most analysts, who are quick to reference the lack of concerns and movement in JGBs or the JPY after prior adjustments. We are definitely not so cavalier. We are not living in the 1990’s and traders are clearly hypersensitive to growing sovereign risks. Full article…

This is more of a cautionary set up than one that I would’ve recommend taking. It involves the power of understanding the Directional Bias of the daily and how longer-term time frames (60 and 240-minute) entries should follow the Bias if there is a trend. This is indeed an (fresh) uptrend on the daily GBP/USD which means that any entry that would attempt to capitalize on weakness would be best taken on the five, 15, or 30-minute charts.

The “twelve to two o’clock” uptrend on the 240-minute chart is pulling back and notice has even pierced teh bottom line of the Wave. Couple this move with a -100 or greater CCI reading and the result would be a Wave/CCI Reversal entry short. But wait…Isn’t the daily in an uptrend? I talk about this relationship a lot as it pertains to trade and time frame selection each and every morning on Forex AM.

The idea behind Directional Bias as it applies to longer-term time frames is to acknowledge that 60 and most definitely 240-minute time frames require more organization of sentiment over a longer period of time for follow-through so it would be best to follow the dominant market psychology (the daily).

So while there may certainly be more “heat” involved with taking a swing BUY it’s following the uptrend (psychology) of the daily.

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