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Euro bulls has a disappointing hugely unprofitable day on Thursday, July 3th, with the release of the ECB interest rate decision and the US NFP data.

Even though the ECB increased the interest rate as expected to 4.25% and the NFP job loss figures at 62,000 were as expected the Euro made a stunning reversal of over 200 pips from its high of 159.09 reached immediately after the ECB announcement and closed below 157.00.

The Euro made a new two month high above 159.00 and within minutes was trading at a stunning weekly low. Of course the problem was that the ECB rate increase to 4.25% and the NFP figure were widely expected. The Euro had advanced on the anticipation and sold off almost immediately with the news. There really should be no surprise in that trading pattern as you see it over and over again. The surprise was in the degree of the sell off.

While one can not say that a long term high was put into place such a strong violent reversal should put one on alert that a reversal is a possibility. Perhaps we will see the Euro trade back down into the 154.00 region and will be able to make a better call from there.

For now I would be wary of being too bearish on the US Dollar. While all of the news is bad the price action on Thursday and while the US market was closed on Friday should be respected.

Perhaps a Euro reversal is in the making. Next week’s trading pattern should make that clear.

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The Fed chairman, Ben “Helicopter” Bernanke, is in the hot seat now. The markets are once again focusing on the next meeting of the Federal Open Market Committee (FOMC) set for Tuesday and Wednesday of this coming week. The Fed is expected to hold interest rates unchanged at this meeting but is clearly in an uncomfortable position.

Inflation is roaring ahead at serious rates of increase and the Dollar is in danger of a collapse on forex markets, which would seem to indicate a need for the Fed to start increasing interest rates. However, increasing interest rates with a soft economy underway, a badly deteriorating housing market, and businesses starting to lay off workers at higher rates would probably throw the economy into a deep recession that the Fed has been fighting hard to avoid. After all, this is an election year.

Ben Bernanke is an avowed advocate of a more transparent Federal Reserve and reactionary, anxious markets are the byproduct. Without the mysterious Alan Greenspan at the helm, the curtain has been pulled back on the Fed to reveal Bernanke as a clear, direct economist who admits he has no crystal ball. Ben Bernanke is a super active nanny and he is already supporting the elite financial interests that have created this speculative bubble in the first place.

Over one trillion Dollars have already been made available to the banks and the brokerages to protect them from their own excesses and to attempt to forestall a deflationary rigor mortis. If these bail out operations had not been taken, if the financial system itself were transparent, the house of cards would surely collapse on us all and the people would lynch Bernanke and any other rich jerk on Wall Street and in Washington that they could get their hands on. Bernanke must not rest well at night knowing just how fragile the financial system still is.

The forex market give Bernanke and the US government clear notice last week that it will take more than talk and a few speeches to improve the prospects for the US Dollar.

The Euro closed the week at 1.5625 against the beat up Dollar after trading as low as 1.5300 immediately after Bernanke’s remarks that the Fed would be paying more attention to inflation. The Yen strengthened to finish the week at 107.25 after trading as low as 108.55.

Dollar bears are not impressed with what Bernanke and company at the Fed say about supporting a strong Dollar. And they are even less impressed at Secretary of the Treasury Hank Paulson’s frequent announcements that the US supports a strong Dollar policy. Forex traders think of Paulson’s pronouncements as more of a long running bad joke than a serious statement of US Dollar policy. It will take strong vigorous action on the part of the Fed to keep the Dollar from really tanking as 2008, the year from Hell, roars on by.

But what is the Fed to do? US policies over the past many years have lead to a weak economy and rapidly increasing prices. The situation is even worse than stagflation as it appears that the economy’s weakness will turn out to be more than that. Prospects for a rapid recovery in economic conditions are not good and things could become much worse. The “D” word has to be entering at least the back of the minds of businessmen and homeowners.

If the Fed makes a real effort to increase interest rates that will probably be a knockout blow to the economy. However, if it does nothing, or raises interest rates by just a little bit, say a quarter point, the markets will likely panic anyhow as that would indicate that the inflation rate is not getting the attention that will be required to bring it under control.