Dollar Sent Lower by Bernanke but Drawing Support from ISM

Dollar’s sell off resumes in early US session after comments from Bernanke which said that housing market’s drag on the economy could persist somewhat longer than expected even though the slump has not spilled over into other parts of the economy yet. He said in his speech “The Housing Market and Subprime Lending” in the International Monetary Conference in South Africa via satellite that tighter standard is now required by investors and creditors will no doubt restrain housing demand in the subprime market and some near-prime borrowers may also be shut out. Regarding inflation, though, Bernanke still believes that risk is to the upside and economy will grow at near trend rate.

Dollar additionally pressured by speculation that the United Arab Emirates may be the next Middle Eastern country to end the dollar peg. Syria and Kuwait had recent announced that they would dump the dollar peg to curb rising import costs and inflation that was pushed up by rising costs of imports from Asia and Europe. However, much stronger than expected ISM non-manufacturing index, which rose to 59.7 in May versus expectation of 55.3, is providing some support to the greenback.

Euro, on the other hand was supported by solid Services PMI in May and IMF’s raising of its forecast for the growth in the Eurozone economy from 2.3% in 2007 to around 2.5%. IMF also expects that the expansion will “continue apace” next year. Though, Apr retail sales missed expectation by growing 0.2% mom, 1.6% yoy only.

The Aussie remains firm too and took out this year high of 0.8390, reaching as high as 0.8406 so far, highest since Aug 90. Though RBA is widely expected to keep rate unchanged at 6.25% in the coming Asian session, expectation is still firm on another rate hike, probably in near term. Also, Aussie continues to draw support from carry trade. Q1 GDP will also be closely watched in the coming Asia session too and is expected to grow 1.0% qoq, 2.9% yoy.


Daily Pivots: (S1) 1.9841; (P) 1.9882; (R1) 1.9952;


Cable’s rise from 1.9733 extends to as high as 1.9968 in early US session, meeting mentioned target of 1.9956/58 cluster resistance (61.8% retracement of 2.0132 to 1.9676 at 1.9958 and 100% projection of 1.9676 to 1.9899 from 1.9733 at 1.9956) as expected. At this point, intraday bias will remain on the upside as long as 1.9891 minor support holds. Sustained trading above 1.9956/58 will encourage further rise to retest 2.0132 high.

On the downside, touching of 1.9891 will turn intraday outlook consolidative first and bring pull back. But downside should be contained by 1.9819 resistance turned support and bring another rally. Break of 1.9819 is needed to signal rise from 1.9733 has completed and turn focus back to this support.

In the bigger picture, risk of medium term reversal remains high even though a retest of 2.0132 high could now be seen. Firstly, the whole up trend from 1.7047 is not clearly impulsive. One interpretation is that rally from 1.7047 ended with three waves up to 1.9024. Subsequent correction ended at 1.8090. Rally from 1.8090 has already met mentioned target of 100% projection of 1.7047 to 1.9024 from 1.8090 at 2.0067. Secondly, regardless of the larger trend, rise from 1.8090 can be interpreted as being a five wave sequence with first wave ended at 1.9142, second at 1.8517, third at 1.9913 and fourth at 1.9183. The channeling property supports this interpretation too. In such case, the fifth wave rally from 1.9183 has also met target of 61.8% projection of 1.8517 to 1.9913 from 1.9183 at 2.0046 too. With bearish divergence condition remains in weekly MACD and RSI, as well as Daily MACD and key 2.0106 resistance (92 high) not decisively taken out, 2.0132 could be the important medium term top already.

On the downside, break of 1.9733 support is needed to revive the case that fall from 2.0132 is still in progress first. Firm break of the medium term rising channel support (now at 1.9634) will indicate that the whole rally from 1.8090 has completed and add much credence to the case that an important medium term top is already formed and put focus to 1.9183 low. However, sustained trading above mentioned 2.0106 resistance will dampen the above interpretation and indicates that underlying bullishness in cable is much stronger then we thought. Further medium term rally should then be seen towards 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677.

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