This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This is my first post for MtM and I hope it will not be my last. I have a very different style than everyone here and my process is a bit on the rudimentary side. That said, I love currencies and I hope Richard and the gang think this information is interesting enough that they’ll keep me around. And I hope to get a lot more discussion here than if I were to post it on my pathetic excuse for a blog.

I am throwing up this chart of EURUSD to show how much backing and filling there is compared to other pairs in what should otherwise be a clear trend for the week. This pair is also a very good barometer of what spot market players think of the USD in relation to the rest of the board. (Just my opinion.)

I suspect that Monday was about establishing early positions ahead of an anticipated rate cut. (Much like the previous Friday, some would say.) Some pundits were saying 0.50 and some were saying 0.25, but behind that was a notion the Fed funds rate would reach 3.0 – if not by Wednesday, then at the next meeting. Off the cuff forecasts from FX traders predicted EURUSD would crack 1.5 later in the week. Interest rate outlooks for other currencies may have clouded the picture, however. (More to follow on that later.)

The consolidation seen on Tuesday is a common occurrence before a rate announcement, as I’m sure everyone knows. This happens even when there are major macro surprises. There was, in fact, significant data released on the day. A new low was recorded in new home sales for December and for 2007 – a 12-year low, as it turned out. There was also a US durable goods surprise to the upside amidst mixed economic data from the EZ.

Wednesday proved to be very volatile as somewhat suggestive (but mixed) inflation and production data again coaxed players into positions before the rate announcement. At this point, everyone was waiting to see whether the cut would be 0.25 or 0.50. There was absolutely no doubt in anybody’s mind that there would be a cut. The bias was for the latter.

Thursday’s rejection of 1.49 was probably due to two main factors. The first, of course, was profit taking at the end of the NY trading session. The second, related in part to the first, is something that often happens after a very volatile day – with no new long orders coming in due to the mixed data that day, institutional and prop traders come in to take advantage of the path of least resistance in thinner markets. This sets up a “see-saw” type of action that some prefer to call chop. It can last for several hours or even days, depending on what is occupying the minds of traders. This time around, it was the upcoming NFP in a decidedly USD-bearish context.

Freaky Friday did not fail to impress, as the downward NFP surprise delivered another victory to doomsters. There was plenty of price action for the pros to pick off manic gamblers as well. It was a feeding frenzy, as can plainly be seen on the charts. It wasn’t the ugliest day for the fish by any stretch, but it was bad.

Let’s talk about Friday a bit more, because there are some good lessons in the price action. The initial NFP figure of -17K was well below the forecast of 70K. This, combined with lower hourly earnings and a decrease of only one tenth of a point in unemployment (not, I would argue, statistically significant), was enough to compel hundreds of thousands of nervous little clicks all across the retail and institutional trading universe. All those itchy fingers pushed price through stops to Friday’s high of 1.4956 bid.

Then the revisions come out – a whopping 64K to the upside for November and almost as much to the downside in October. Seems the NFP report apparatchiks are producing a lot of large monthly revisions these past few years. The November revision was key here and it became clear to USD shorts that a bear trap had been set, but only after it caught just about everyone on the long side by surprise. (I’m sure it caught a few on the short side by surprise as well.) EUR longs were liquidated, creating a short side cascade. By the time the day was over, price had closed near the day’s lows.

So Friday shaped up to be a bearish outside day for the EURUSD and, as if that weren’t enough to cast a bit of a pall on long positions, there is the specter of a triple top forming – although it has a ways to go on the dailies before I would come out and call it that. Upward pressure should continue to keep the pair buoyant in the near term and I would not be surprised to see another run on 1.5 very soon.

To sum up, data from the EZ was mixed, with the only growth-worthy indicators being the PMI figures across Europe. In the US, data was mixed as well although on the whole it was decidedly bearish. Technically, the EURUSD trend remains long, although its strength has to be in question at this point. There are few prospects for growth on either side of the equation and the rate outlooks are not too different.

Tomorrow I’ll take a look at EURUSD going into next week, as well as some other pairs, and try to identify possible areas of opportunity.

One more thing. There are probably errors in this analysis. And the rest is just my opinion. Please take pity on me and point these errors out.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com