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By Kathy Lien, Chief Strategist of DailyFX.com
Oil at $130 pushing US Dollar and stocks higher
Oil prices have continued to fall, helping to lift the US dollar and stocks.
The reversed roles of oil and stocks, with the former falling and the latter rising comes as a big relief to traders around the world who may have feared for the worst - crude prices hitting $150 a barrel and the Dow falling below 10,500.
Lower oil prices act as a free tax cut for consumers and businesses who are currently crumbling under the weight of rising food and energy prices.
The answer to many of the Fed's problems would be oil at $100 a barrel. Since Monday, oil prices have fallen close to $18 or more than 12%, which is in line with the degree of prior corrections that we have seen in the commodity.
This has made investors cautiously hopeful that the stock market has bottomed and oil prices have topped.
Whether or not this is true remains to be seen. For the sake of the global economy, we hope that oil prices continue to ease, but we have seen similar recoveries over the past two years (oil charts) be nothing more than a hiccup.
As for the US dollar, it has strengthened significantly against the Japanese Yen and recovered impressively against the Euro and British pound.
Since the beginning of 2007, there has been a strong correlation between USD/JPY and the S&P500 Index, which explains why the currency pair has rallied more than 200 pips.
A strong dollar not only helps to lower oil prices but it also increases investor confidence. The Financial Times reported that the weakness of the dollar and the problems in the US capital markets are encouraging Sovereign Wealth funds to look at diversifying out of dollar denominated assets.
Economic data from the US was mixed. Housing starts, building permits and jobless claims were all better than expected but the Philadelphia Fed index failed to rebound.
The improved housing market numbers are somewhat distorted by a change in the NYC building code which has triggered a sharp rise in multi-family starts in the Northeast.
Claims on the other hand are unambiguously positive. There will no US data due for release tomorrow which means that oil and equities will continue to drive the price action of the US dollar.
EUR/USD: Bulls and Bears locked in a tight battle
EUR/USD bulls and bears are locked in a tight battle as hawkish comments from ECB officials prevent the currency pair from succumbing to the recovery in the US dollar.
ECB President Trichet said that even though the markets are still suffering from very severe turbulence, the central bank cannot afford to second round effects to get out of hand.
More specifically he said that the central bank is determined to bring inflation from 4% back down to 2%.
They are keeping a particularly close eye on the rise in unit labor costs and reminding household and businesses that they are guaranteeing price stability in the medium term.
ECB member Wellink went one step further in his comments this morning. He said that 'if you don't stop inflation before it rises further, it will take 10 years to get it under control.'
German producer prices and the Eurozone Trade Balance are due for release tomorrow and we expect the data to be Euro bullish.
Pound Sterling: Struggling to hold onto gains
The pound is struggling to hold onto its gains against the US dollar.
Kathy Lien, Chief Strategist, Daily FX
