Euro Rebounds, Canadian Dollar Surges on Rate Talk

Dollar weakens broadly today and upside surprise in Conference Board consumer confidence is not giving any help to the greenback.
The consumer confidence index rose more than expected to from 104.0 to 108.0 in May. Euro strengthened across the board since European session on couple of factors. ECB Governing Council member Axel Weber said in an interview with the Financial Times Deutschland that the bank is prepared to shift to a restrictive monetary policy if needed to keep inflation in check. Executive Board member Juergen Stark also said ECB on high alert over inflationary dangers in the eurozone and ready to respond as necessary given strong money growth and high capacity utilization. Together with rumors on emerging market central banks’ shuffling of reserves from dollar to Euro, the common currency rebounds strongly against dollar and also recaptured earlier loss to the Japanese yen by making new record high in the EUR/JPY.

BoC kept rate unchanged at 4.25% as widely expected. In the press release, BoC made specific mention of the continued high inflation say “both total CPI inflation, at 2.2 per cent, and core inflation, at 2.5 per cent, were above expectations,” and would average 2.2% for Q2. Growth is expected to be 3.5% this year, ” a full percentage point higher than was estimated in the MPR.” With increased risk that future inflation will persist above the 2% target, “some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.”. This is taken to be a step to set the stage for a July hike. USD/CAD falls sharply to new 30 year low of 1.0720 after the news. Markets will turn focus to PPI and GDP data later this week.


Daily Pivots: (S1) 1.3446; (P) 1.3451; (R1) 1.3459;


EUR/USD rebounds strongly to as high as 1.3519 today. As discussed before, with 1.3364 cluster support (38.2% retracement of 1.2865 to 1.3681 at 1.3369) remains intact, it’s still unclear whether fall from 1.3681 is merely a correction to rise from 1.2865 or the start of a deeper decline. Break of 1.3501 resistance, with bullish convergence condition in 4 hours MACD and RSI, is arguing that the fall from 1.3681 is corrective and has completed with three waves to 1.3411 already. At this point, further rise is in favor towards short term falling trend line resistance (now at 1.3555) and then 1.3609. Break will confirm such case and bring retest of 1.3681 high. On the downside, it will take a break below 1.3418 support to indicate fall from 1.3681 has resumed for 1.3364 cluster support.

In the bigger picture, risk of 1.3681 being an important medium term top is still high. As discussed before, medium term up trend from 1.1639 is interpreted as having first move completed with three waves up to 1.2978, subsequent sideway consolidation completed at 1.2483. Rise from 1.2483 is treated as resumption of the whole up trend from 1.1639. With such interpretation, we’d expect risk of medium term reversal to increase significantly after EUR/USD met resistance zone between 1.3668 and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. Hence, focus is now on reversal signals.

On the downside, break of the short term rising channel support is already a warning that the rise from 1.2865 has completed. Decisive break of 1.3364 cluster support (38.2% retracement of 1.2865 to 1.3681 at 1.3369) will confirm such case. More importantly, with bearish divergence condition in daily MACD and RSI, this will warn that the whole rally from 1.2483 has also completed, and, so is the whole up trend from 1.1639. Focus will then be back to medium term rising channel support (now at 1.3029).

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