17/07/'07 - Forex Market keeps the U.S. currency under selling pressure.
Economic News
USD
The USD Trading was battered across the board as investors pre-empted poor data out of the U.S. this week, showing declines in inflation. Some analysts say weakness in the housing sector combined with a slowdown in inflation may even lead the Federal Reserve to reduce interest rates early next year. Markets are currently pricing in about a one-in-six chance that the Fed will cut interest rates by a 0.25 point in 2007. We at Foreyard LTD. examine the economic pressures which the USD are handling with and we found that its more likely that a new record would be determine before the USD will significantly strengthen. Yesterday, the Empire State Factory data saw a robust leap to 26.5 which was way above consensus forecasts of 18.0. To provide a little clarity the 6-month average lies at 15.04 so it is well above the trend. Indeed, even the individual components looked pretty strong too. The weakness of the US dollar and persistent rise in oil prices will keep the Federal Reserve's hawkish policy as they bank their hopes for a second half recovery on the movements of the US currency. We have already seen the benefits that a weak dollar can instill on the economy, when last week, the US reported that exports rose to a record high in the month of May and it could not have done so without a weaker dollar which makes the commodities more economically attractive for buyers around the globe . Since the beginning of last year, the trade weighted dollar has fallen 7.7 percent and is now testing lows last seen in the end of 2004. The jump in the Empire state manufacturing survey confirms that the weak dollar continues to benefit the manufacturing sector. After hitting a 1 year high last month, analysts were looking for a sharp retrenchment, but activity continues to accelerate with the manufacturing index edging up to its highest level since June 2006. Today, the action begins with producer prices, followed by the Treasury International Capital flow report, Industrial Production and the NAHB housing market index. Net foreign securities purchases and industrial production are expected to remain strong, but the expectations for producer prices are low despite the jump in import prices. With the rally in the EUR/USD becoming exhausted, any upside surprise could drive a much needed recovery in the US dollar. The FX markets are cyclical, so the path to a stronger dollar will be through a weaker one. The upcoming days may deliver new tidings for the forex market when tomorrow the Federal Reserve Chairman Ben Bernanke will deliver his semi-annual testimony on the economy and monetary policy which may be used as a catalyst of the USD recovery. The Bottom line The Path to a Stronger Dollar is through a Weaker One.
EUR
Even though the EUR closed the day near its all-time highs, the
currency trading pair's inability to extend its rise offers that it could be setting up for the upcoming correction. Consumer price growth slowed last month from 0.2 percent to 0.1 percent in the Euro zone. This is the tenth straight month that CPI has remained below the central bank's 2% target, which in the current circumstances might be significant and even point at a recovery from their winter sleep. The Euro-Zone inflation rate and the core rate stayed at 1.9% for the fifth month running. Given that the European Central Bank's definition of price stability is close to but below 2%, this string of 1.9% outcomes must be quite satisfying for ECB officials. In case we do see stronger producer prices from the US today and hawkish comments from the Fed later this week, it could help to triggered a nice correction in the EUR/USD. Also today, Germany will be releasing the ZEW survey we are looking for a firmer number however, given recent interest rate hikes, analyst sentiment could easily deteriorate. The GBP is in play this week and Today's report on consumer price growth will be the first piece of key economic data to come out from the UK. The combination of a drop in producer prices and a strong currency suggests that consumer price growth will slow as well. However even though the recent strength of the GBP is expected to push inflation lower, UK economic data has a habit of catching everyone by surprise. Traders will be using the CPI number to forecast whether Wednesday's release of the BoE minutes from the meeting held earlier this month will be pound positive or negative. The minutes have become extremely market moving as we recall, the turn that we saw in the middle of June was triggered by surprisingly hawkish MPC minutes. A near unanimous decision to raise rates would accelerate further gains, while more than 2 dissenting votes would probably be construed as dovish, which would mark a top in the currency pair.
JPY
With no major US data released yesterday and the Japanese markets closed for a holiday, carry trades have succumbed to profit taking. Most of the JPY crosses are either flat or slightly lower (except the NZD/JPY). The fact that they did not continue to rise after a fairly large earthquake hit North West and Central Japan is a testament to the currency market's continual appetite for risk. Japan's tertiary index, which measures spending in the services sector, dropped 0.1 percent in May from April, the second decline in five months, the Ministry of Economy, Trade and Industry said Tuesday, citing preliminary data.
The index stood at 110.2 in May, slightly below February's 110.7, which was the highest level since January 1988. That followed a revised 1.6 percent rise in April from the previous month. Year-on-year, the index increased 1.3 percent in May after a revised 1.2 percent gain in April.
The services sector employs more than half of Japan's workforce, and spending on services such as retailing, dining and travel is closely tied to changes in income and consumer confidence. Based upon last week's monetary policy meeting, the Bank of Japan is in no rush to raise interest rates as usual when the BOJ is finally raise rate the influence is even less then mildly on the currencies. As long as this stance is confirmed by the release of their minutes from the meeting held between June 14 and 15, the market will not be worried that an interest rate hike by the Japanese will be what puts an end to the carry trade. Instead, another major headline about the problems in the sub-prime sector exacerbating could be the catalyst for a sharp increase in risk aversion.
Technical News
EUR/USD
On the 4 Hour chart we notice that the bullish trend is running a head. The volatility decreases and the EUR/USD is in a consolidation after it has broken the 1.3780 resistance level. The price should continue to move upwards in a range of 1.3735 to 1.3820. As it seems, the bullish pressure will continue to gather momentum as well today.
GBP/USD
On the 4 Hour chart, a bullish rising wedge is forming which may imply a continuation of an additional bullish move. It's recommended to time the entrance to the market with short term charts. 2.0350 seem like a strong entry point. At the moment GPB/USD is traded around the 2.0310 /2.0410 range. The volatility is low and we should expect the bullish pressure to continue. 2.0400 is now a strong resistance.
USD/JPY
The USD/JPY broke the 121.80 support and the downtrend is supported by 1 Hour exponential moving averages. The volatility is low and the Bollinger bands are tightened. We should expect to see the bearish configuration continue. The 4 Hour Elliott pattern implies that the USD/JPY will continue to gather momentum. The target price might be 121.00
USD/CHF
The USD CHF is in a bearish configuration, as the volatility decreases. The pair moves without a trend and swings around exponential moving averages (EMA 50 and 100). Bollinger bands are tightened and the 4 Hour Elliott pattern implies a continuation of the bearish pressure.
The Wild Card
EUR/JPY
On the 4 Hour chart, the 5 Elliott pattern can be observed and the A, B, C structure is t forming. In this case the C wave is expected to make the pair consolidate at 167.50. This provides Forex traders with a great opportunity to enter the market at a long position.