| Market Overview | Written by ActionForex.com | Aug 09 08 22:26 GMT | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Just as we talked about dollar was building up medium term strength last week, dollar staged an impressive broad based rally. How impressive was that? EUR/USD had the sharpest weekly fall in three years and the steepest daily decline on Friday. USD/CAD posted the biggest weekly rise since 1971. GBP/USD dropped to a 21 month low. AUD/USD extended the longest losing streak since 1980 and dived below 0.9. A couple of factors were behind the greenback's impressive strength. Continuous weakness in commodity prices certainly played an important part. Crude oil dropped sharply by $10 from $125 level to $115 level. Gold also dived from $890 level to $850 level. The decline in commodity prices put additional pressure to commodity currencies including Aussie, Kiwi and Loonies. In addition, Aussie was sold off after RBA signaled it will cut rates. Canadian dollar was sold off on much worse than expected employment report. Euro, on the other hand, was dumped with traders paring bets on more hike from ECB after Trichet hinted that rates will be firmly on hold. The technical implications of last week's rally in dollar were even more significant, with EUR/USD completed a double top reversal pattern, GBP/USD broke out of medium term consolidation, confirming the medium term strength in the greenback.
Fed left rates unchanged at 2.00% as widely expected with Fisher as the lone dissenter again, voted for a hike. Fed's accompany statement was rather balanced and less hawkish than expected. The committee still expects inflation to moderate later this year and next but believe that the outlook remains "highly uncertain". Also, the fed believes that the substantial easing of monetary policy, and liquidity fostering measures will help to promote "moderate economic growth". More importantly, the statement emphasized that Fed will continue to monitor the developments and "act as needed" to promote "sustainable economic growth" and "price stability." The statement suggested that Fed is still firmly on hold in the near future and gave no indication on when the Fed's next move will be. Though, markets are still pricing around 75bps cut from Fed in the next twelve months. Personal Income beat expectation by rising 0.1% in Jun but prior month's growth was revised down from 1.9% to 1.8%. Spending growth slowed from 0.8% to 0.6% but was above consensus of 0.5%. More importantly, headline PCE surged sharply to 4.1% yoy while core PCE also climbed more than expected to 2.3% yoy. Both headline and core PCE in May were revised higher. Pending home sales unexpectedly posted 5.3% mom gain in Jun versus consensus o f-1.0%. ISM non-manufacturing index improved more than expected to 49.5 in Jul. Factory orders rose strongly by 1.7% in Jun vs expectation of 0.7%. US jobless claims jumped again to 455k. US Q2 productivity rose 2.2%, labor cost rose 1.3%, both below expectation. ECB left rates unchanged at 4.25% as widely expected. Trichet continued to sound hawkish in the following press conference, emphasizing the upside risks to inflation and ECB's sole mandate of maintain price stability. Trichet expects inflation to remains far above target for protracted period of time. Also, Trichet played down recent weakness in Q2 GDP by saying that it's just a 'technical correction' after exceptionally strong growth in Q1. Though, Trichet once again said that ECB has no bias regarding monetary policy for the moment, suggesting that ECB is still on firmly on hold. Also, the mentioning of "substantial decline in annual M1 growth" was seen as an important obstacle to further rate hike from ECB. Indeed, markets were clearly worried about the possibility of deepening in the slow down in the Eurozone economy and was starting to price in rate cuts from ECB in the coming year. Eurozone Services PMI dropped to 48.3 in Jul. Retail sales dropped -0.6% mom, -3.1% yoy. Eurozone PPI rose 8.0% yoy in Jun. Germany Factory orders came in much worse than expected, dropping -2.9% mom, -6.1% yoy in Jun. Industrial production climbed 0.2% mom, 1.7% yoy in Jun. Trade surplus widened more than expected to 19.7b with strong rise of 4.2% mom in exports. BoE left rates unchanged at 5.00% as widely expected. Focus will turn to inflation report to be published on Aug 13 and minutes to be published on Aug 20. The National Institute of Economic Social Research (NIESR) forecasted that UK GDP growth will slow to slowest pace since 2005 at 0.1% in the three months to July. Nationwide consumer confidence in UK dropped further to 51 in Jul. Construction PMI released earlier today dropped to record low of 36.7 in Jul. Services PMI unexpectedly improved to 47.4 in Jul. Industrial production and manufacturing production were disappointing with IP dropping -0.2% mom, -1.6% yoy in Jun, MP dropped -0.5% mom, -1.3% yoy. Halifax house priced dropped -8.8% yoy in Jul, -1.7% mom. Swiss SVME PMI came in at 54.1. Unemployment rate was unchanged at 2.3% in Jul. Japanese leading indicators dropped less than expected by -1.7% in Jun. Machine orders dropped -2.5% mom, rose 9.7% yoy in Jun, better than expectation. Economic watch DI dropped mildly to 29.3 in Jul Canadian employment report showed unexpected sharp contraction in the job market by -55k versus expectation of 5k growth. Unemployment rate indeed dropped 10 basis point to 6.1% but that was mainly due to a number of youth left the labor force. Building permits dropped much more than expected by -5.3% in Jun Ivey PMI dropped less than expected to 65.5 in Jul. Australian dollar was sharply lower after RBA left rates unchanged at 7.25% and signaled a rate cut in the accompanying statement. The statement sounded rather dovish on growth, expecting that demand will likely remain "subdued' and economic growth will be 'fairly slow'. Inflation remains high but will likely decline overtime given the outlook for demand and will fall below 3% during 2010. More importantly, RBA judges that the scope to move towards a 'less restrictive' stance of monetary policy in the period ahead is 'increasing'. Markets are pricing as much as 1% cut from RBA in the next twelve months with some aggressive speculations that RBA could cut by 50bps in Sep. Australia's house price index showed first drop in almost three years, falling -0.3% qoq, dragging yoy rate down to 8.2% in Q2. Though, the reading was slightly better than expectation of 1.0%qoq, 8.2% yoy. Job market added 10.9% job in Jul, above expectation of 5.0k. Nevertheless, prior month's growth was revised down from 29.8k to 22.k. Unemployment rate was unchanged at 4.3% after upward revision in Jun. New Zealand job markets grew 1.2% qoq, 0.7% yoy in Q2, beating expectation of 0.2% qoq, -0.6% yoy. Though, unemployment rate rose more than expected to 3.9%. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Week Ahead
Note the strength of the last week's rally in dollar suggests that it should at least be in the scale of a medium term rise. Hence, while the dollar is strongly overbought and a pullback is due, it doesn't necessarily mean the rally will be limited by an important resistance no matter how important that resistance is. Traders are advised not to jump on a short term reversal and risk catching a falling knife. Instead, near term support/resistance levels mentioned in our technical report could be used as indications for sign of start of a short term correction in the greenback.
As mentioned before, the a couple of factors are behind dollar's recent strength, including weakness in commodities, expectation of rate hike from Fed, shifting in expectation to rate cut from ECB and RBA. The development in these factors should be paid close attention to this week.
Firstly, oil could see some support at it approaches key medium term support at around $110 level while Gold is also close to $845 key support. The reactions from these levels could be wild on either side which could trigger sharp moves in the greenback. Secondly, US data, including retail sales, import prices, CPI, empire state index, industrial production and U of Michigan consumer sentiment will be watched for sign of bottoming in the US economy and risks of rising core inflation pressure which is needed to solidify the case of Fed hike. Thirdly, Eurozone Q2 GDP will be watched for how deep the slow down could be. Fourthly, RBA quarterly monetary statement will be scrutinized for affirming the case of rate cut. Inflation will be main focus in UK with CPI, PPI and more importantly, the BoE quarterly inflation report scheduled. Other important data includes Canadian housing, trade balance, Japan Q2 GDP, UK employment report, Eurozone industrial production and HICP final, and New Zealand Retail sales.
EUR/USD Weekly Outlook
EUR/USD's fall from 1.6038 accelerated last week and took out double top neck line support at 1.5284. The pair breached 1.5 psychological support briefly to as low as 1.4977, just inch above the next key medium term support at 1.4966 level. Considering that EUR/USD is deeply oversold, as seen in readings in both 4 hours and daily RSI, and is now near to some key medium term support levels, with 1.4966 resistance turned support, 38.2% retracement of 1.3262 to 1.6038 at 1.4978, 61.8% retracement of 1.4309 to 1.6038 at 1.4969 and 55 weeks EMA at 1.4945. A rebound is due for retesting double top neckline resistance. But still, a break above 1.5134 minor resistance is needed to indicate that a short term bottom is in place first. Otherwise, further decline is still in favor.
On the upside, above 1.5134 will bring rebound to the neck line support turned resistance at 1.5284 and above. But upside should be limited below 1.5628 resistance and bring fall resumption. On the downside, sustained trading below mentioned 1.4945/78 support zone will set the stage for even deeper for towards next important cluster support at 1.4309.
In the bigger picture, break of 1.5284 support confirmed the double top reversal pattern (1.6019, 1.6038). A medium term top should at least be formed on bearish divergence condition in daily MACD and RSI as well as weekly RSI. However, the question is still on whether whole medium term up trend from 1.1639 (05 low) has completed and it's still early to make a conclusion yet.
Focus will now be on a) the structure of the decline from 1.6038 and subsequent rebound b) whether key support level of 1.4309, (38.2% retracement of 1.1639 (05 low) to 1.6038 at 1.4358, 61.8% retracement of 1.3262 to 1.6038 at 1.4322) will hold; c) whether next trend line support (1.1825, 1.2483, now at 1.4301) will hold; d) whether weekly MACD will turn negative and e) whether monthly MACD will cross below signal line. So far, the scale and strength of the fall from 1.6038 is mildly favoring the case the up trend from 1.1639 has indeed completed but developments in other items mentioned will be closely watched to affirm this case.
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