Could FOMC Send Dollar Down Further?
Dollar’s rebound was rather brief and reversed weakened again sharply, in particular on Friday after a string of worse than expected economic data, concern on the subprime problems and speculation of a rate cut by end of 07. The trends in European majors remains intact and has possibly resumed. Further downside in the greenback should be seen in the near future. On the other hand, judging from the relative firmness in both the Japanese yen and Swiss Franc in crosses, carry trade unwinding is not done yet and any bad more bad news from the stock markets or the credit markets themselves will likely trigger more yen and swissy buying.
Data from the US were generally disappointing, with core PCE deflator dropping to 1.9% in Jul from an upwardly revised 2.0%. Chicago PMI dropped to 53.4 vs consensus of 58.0. ISM manufacturing index dropped to 53.8 vs consensus of 55.5. ISM non-manufacturing index dropped to 55.8 vs expectation of 59.0. Non-farm payroll came in at 92k only, far below expectation of 127k with unemployment rate rising slightly from 4.5% to 4.6%. The only piece of better than expected data was the conference board consumer confidence which rose to 112.6 vs consensus of 105.0. In addition, there were additional news about the spillover of US subprime mortgage problems to other parts of the world. After all, the developments are raising the speculation that Fed could need to cut rates before the end of 07 to save the economy from being further damaged by the subprime problems. Dollar was sent sharply lower despite extending the rebound initially.
The biggest event from Eurozone last week was the ECB teleconference meeting, where ECB kept rates unchanged at 4.00%. Unusually, Trichet held a press conference after the meeting and used his magical “vigilance” word to signal a rate hike in Sep. However, there isn’t any further comments from Trichet regarding whether rates are still accommodative, etc. And it left the market with speculations that ECB is now closer to the end of the current tightening cycle.
BoE also left rates unchanged at 5.75% last week. Though data was generally solid, Sterling continued to be pressured, together with other high yield currencies, by carry trade unwinding. On the other hand, Japanese yen and Swiss Franc continued to gain support. Though the yen somewhat turned into consolidation after being extremely overbought in short term, there is no noticeable signal of trend reversal yet and further upside in the Japanese currency is still in favor in near term at least.
The Week Ahead
The main event of this weekly is undoubtedly the FOMC meeting. Fed is expected to keep rates unchanged at 5.25% for sure. The focal point will again be on the accompanying statement. Firstly, it will be interested to see if Fed will soften further on its tone on inflation, in particular as core inflation did show some sign of continuous moderation. Secondly, apart from inflation, the main concern of the markets is on how worse the subprime problem will be and the extent of the drag of growth. Fed’s view on these area will likely further shape market’s speculation for a rate cut in the near term. And should the Fed starts to sound dovish, dollar will likely be sent further lower against most majors.
RBA rate decision will be another focal point of the week where market expected RBA to raise rate again by 25bps to 6.50%. However, another rate hike won’t necessarily mean more rise in the Aussie a focus will be on the statement for the odds on further tightening as well as risk aversion.
EUR/USD
EUR/USD’s strong rally on Friday confirmed that correction from 1.3851 has completed at 1.3609, after drawing support by mentioned support zone of 1.3567 to 1.3658, with 38.2% retracement of 1.3262 to 1.3851 at 1.3626 as expected. From a short term angle, though overbought condition might keep upside below 1.3851 high initially this week and bring consolidation. Downside should be contained above 1.3712 resistance turned support and bring rally resumption and break of 1.3851 high. However, a break below 1.3712 support will suggest that correction from 1.3851 could still be in progress for another test of 1.3567/3658 support zone before completion.
In the bigger picture, firstly, the momentum of the rise from 1.3262 is seen stronger than the prior rally from 1.2865 to 1.3681. Secondly, the falling trend line in both daily MACD and RSI were broken, negating the bearish divergence conditions. In other words, the underlying bullishness in EUR/USD could be much stronger than we originally thought and the rise from 1.3262 could be part of another set of medium term rally instead of the last advance of a 5 wave rally from 1.2483 that we originally thought.
Focus remains on 1.3822/3851 resistance (100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822). Sustained trading above this level will add much weight to the case that whole medium term rally from 1.1639 is indeed resumption of multi-year up trend from 0.8223 (00 low). That is, further rise should be seen in medium term towards 95 high of 1.4523 with much chance to extend further to 61.8% projection of 0.8223 to 1.3668 from 1.1639 at 1.5004.
On the downside, break of 1.3481 will warn that 1.3851 could indeed be an important medium term top. 1.3262 low will be back into focus and break will indicate that medium term rally from 1.1639 has likely completed after being limited by 1.3822 resistance as originally expected.
Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY, EUR/JPY) here.
Shing-Ip Tsui is the founder and CEO of www.ActionForex.com. ActionForex is set up with the aim to empower individual forex traders by providing insightful contents. Analysis reports, live pivot points on majors and crosses, etc are provided with collection of carefully selected educational articles and free trading ebook downloads.