Daily Report: Senate Approved Rescue Plan, Euro Tumbles ahead of ECB

Market Overview | Written by ActionForex.com | Oct 02 08 07:41 GMT |

Dollar extends rally against most major currencies after the $700b rescue plan was approved by US Senate overnight on a 74-25 vote. While the core of the plan was kept and the US government will be able to buy troubled assets from financial institutions, the plan is sweetened by increasing FDIC protection temporarily from the current $100k to $250k and a $149b package of tax breaks. The revamped bill will return to House, which rejected the original version by 228-205 vote on Monday and triggered a historical crash in the US stock markets. House leaders are believed to be working to get enough votes to get the bill passed as early as Thursday evening.

Euro extends weakness against dollar and yen as focus is now turning to ECB rate decision and press conference. Markets widely expect ECB to keep rates unchanged at 4.25% today. However, as the credit crisis is now clearly spreading over to Europe, markets are starting to speculate that Trichet could be forced to a rate cut by year end. Recent moderation of inflation and money supply growth are also giving room for ECB for easing the monetary policy. Hence, the focus today will be on sign of softening in Trichet's tone and thus for assessing the possibility and timing of rate cut from ECB.

Technically speaking, the development is so far inline with our view. EUR/USD just make a new low at 1.3865 and is pressing key medium term support of 1.3851. EUR/JPY also takes out 147.03 low to 146.24 so far. Dollar and yen are both expected to extend gains against most major currencies.

On the data front, Australia trade surplus came in wider than expected at 1364m in Aug. UK Nationwide house price dropped -1.7% mom, -12.4% yoy in Sep. Eurozone PPI, US jobless claims and factory orders will be released later today.
EUR/JPY Daily Outlook

Daily Pivots: (S1) 146.87; (P) 148.72; (R1) 149.94; More.

EUR/JPY's break of 147.03 low confirms that sharp fall from 169.96 has resumed. At this point, intraday bias remains on the downside as long as 148.09 minor resistance holds. Further fall should be seen to next target of 61.8% projection of 169.96 to 147.03 from 156.84 at 142.67 first. Above 148.09 will indicate an intraday low is in place but further decline is still expected after brief recovery.

In the bigger picture, sustained trading below the long term rising channel added strong evidence that whole up trend from 88.97 (00 low) has completed, with bearish divergence conditions in weekly MACD and RSI and with monthly MACD remains below signal line. Break of 149.27 provides further credence too. Hence, the fall from 169.96 is expected to extend further to 38.2% retracement of 88.97 to 169.96 at 139.02 first. While some rebound might be seen, medium term outlook will remain bearish as long as 156.84 resistance holds.

Economic Indicators Update

GMT  Ccy  Events  Actual  Consensus  Previous  Revised
1:30  AUD  Australia Trade balance (aud) Aug  1364M  200M  -717M  -700M
6:00  GBP  U.K. Nationwide hse price M/M Sep  -1.70%  -1.60%  -1.90%  -1.70%
6:00  GBP  U.K. Nationwide hse price Y/Y Sep  -12.40%  -12.40%  -10.50%  
8:30  GBP  U.K. PMI construction Sep   38.9  40.5  
9:00  EUR  Eurozone PPI M/M Aug   -0.50%  1.10%  
9:00  EUR  Eurozone PPI Y/Y Aug   8.50%  9.00%  
11:45  EUR  ECB rate decision   4.25%  4.25%  
12:30  EUR  ECB Press conference     
12:30  USD  U.S. Jobless claims   475.0K  493.0K  
14:00  USD  U.S. Factory orders Aug   -2.50%  1.30%  
14:35  USD  Natural Gas Storage    51B