Dollar Recovers After CPI, Short Term Bottom In Place?

After edging to new record low against Euro earlier today, dollar recovers the losses and is sent higher in early US session after higher than expected headline inflation data. CPI stayed unchanged at 2.7% yoy in Jun, which is above consensus expectation of 2.6%. Meanwhile core CPI stayed unchanged at 2.2% too. The report suggest that inflationary pressures remain broadly under control but there is little evidence for the Fed to relax from its tightening bias yet. The data also provides further support for the Fed to hold the fed funds rate steady at 5.25% in the near term considering that further moderation in inflation would likely be seen with below-potential growth and further slowdown in the housing sector.

Speaking about housing markets, even though building permits ell to fresh 10-year lows of 1.406m annualized rate in Jun, which is much lower than expectation of 1.48m, housing starts provides a breather as it rebounded from a downwardly revised 1.434m in May to 1.467m in Jun, which is slightly about expectation of 1.46m.

Later today, focus will center around Bernanke’s two-day semi annual testimony. His comments will be heavily scrutinized by markets for clues on monetary policy and related topics including inflation as well as the the impact of the subprime mortgage market.

Released earlier today, the BoE minutes revealed that it moved the base rate upward by a quarter point to 5.75% at the conclusion of its Jul meeting, voting 6-3 to hike rates, inline with market consensus. Six members of the committee (including the Governor Mervyn King, John Gieve, Kate Barker, Tim Besley, Andrew Sentance and Paul Tucker) voted in favour of the proposition. However, the minutes suggest that there is no particular urgency, even among the hawks, to have another rate hike in the near term. Even though markets still expect another quarter point hike to 6.00% before the end of the year, the timing will likely be in Q4 and the odds for another one to 6.25% is not that high at this point. Though, the next quarterly inflation report on Aug 8 could still change this expectation.

Technically speaking, while dollar remains particularly weak against the broadly strong Sterling, short term downside momentum has been diminishing against Euro and Swissy for some time. Today’s break of near term support in EUR/USD and resistance in USD/CHF could be the mark of a short term bottom in dollar and some more rebound could be seen in the coming days in profit taking buying in the greenback continues.


Daily Pivots: (S1) 1.3758; (P) 1.3778; (R1) 1.3800; More

EUR/USD retreats sharply after a marginal break of 1.3822 fibo resistance (100% projection of 1.1639 to 1.2978 from 1.2483). The break of 1.3757 minor support, with bearish divergence condition in 4 hours MACD and RSI, suggests that a short term top could be in place at 1.3833 already. At this point, intraday bias is flipped to the downside for 4 hours 55 EMA (now at 1.3725). Break will encourage deeper decline towards 1.3567 support. On the upside, sustained break of 1.3833 is needed to confirm recent rally has resumed. Otherwise, short term outlook remains neutral with risk of another fall.

In the bigger picture, the current development is dampening the original view that rise from 1.3262 is the last advance in a five wave structure that started at 1.2483. Firstly, the current 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.

Focus remains on 1.3822 resistance. 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, focus will be on 1.3481 cluster support (61.8% retracement of 1.3262 to 1.3833 at 1.3480). As long as this support holds, the fall from 1.3833 will still be treated as correction to rally from 1.3262 only and another rise is still in favor after completion. However, break will put 1.3262 low 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.

EUR/USD 4 Hours Chart - Forex Education, Forex Course, Forex Tutorial, Forex eBooks, Forex Training

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Shing-Ip Tsui is the founder and CEO of 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.