Dollar recovers after Fed’s pause
Dollar continues to recover after Fed’s pause yesterday. The unexpected strength in dollar could be a result of cover on news profit taking, due to speculation of another hike later as “inflation risk remains” or other factors. But one thing is sure. The upside momentum is far from convincing. And after the key event is over, market seems lacking a major theme and short term direction for the moment. We believe, from medium term point of view, dollar is still bearish against european currencies as rate gap between dollar, euro and sterling will more likely narrow than widen. Fed statement can be found here.
Major focus today will be on BoE’s quarterly inflation report. After last week’s surprise rate hike, market will be looking into this report on hints of another hike this year. Expectation is that BoE will say that annual increase in CPI will continue to remain above 2% target and inflation might continue to accelerate this year. However, it is expected that BoE would forecasts inflation to slow in 2007 and reach the 2% target towards the end of next year.
GBP/USD
Daily Pivots: (S1) 1.9022; (P) 1.9083; (R1) 1.9134;
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Cable edged higher to 1.9142 yesterday but quickly retreats to as low as 1.8971 on broad based dollar buying. With 4 hours MACD remains below signal line and RSI retreated from overbought region, a short term top is possibly formed already and risk turned to the downside for further consolidation and pullback Hence, as long as cable stays below 61.8% projection of 1.7230 to 1.9024 from 1.8090 at 1.9199, we’d expect further consolidation. Break below 1.8926 support will confirm such case and bring further retreat towards 4 hours 55 EMA (now at 1.8552).
In a bigger picture, rally from 1.8090 has now pushed cable above 1.9024 cluster resistance (78.6% retracement of 1.9554 to 1.7047 at 1.9018), confirming the case that such rally should be the fifth wave advance in the medium term five wave rally from 1.7230 (or from 1.7047). Firm break above 1.9199 projection target will now encourage further rise to 1.9554 (2004 high).
On the downside, as long as any correction/consolidation is contained above 1.8538 resistance turned support, the rise from 1.8090 is still in progress and medium term outlook will remain bullish. Below 1.8538 will suggest that the whole rise from 1.7047 has possibly completed and cable has turned into wide range consolidation before another medium term rally.
Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY) here.
Shing-Ip Tsui (Shing) 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.