Euro Sent Lower After ECB Conference, Yen Correction Continues

Euro was sent lower against dollar after Trichet has changed his tone on describing the current level of interest rates and said it’s now “moderate” rather than “low”, suggesting that rates could be nearing neutral. While dollar rebounds strongly across the board the Japanese yen remains weak and continues to correct last week’s sharp rally.

ECB raised rate by 25bps to 3.75% as widely expected. In the press conference, ECB President Trichet said that the current rate is still supportive of economic growth and that the monetary policy continues to be on the “accommodative side” but he also said that rates are now “moderate” rather than “low”, which is a shift in tone that suggests rates are nearing neutral. That has sent the Euro lower against dollar. ECB’s growth forecasts for 07 and 08 were revised up to 2.1-2.9% and 1.9-2.9% respectively. Meanwhile inflation forecasts are lowered in 2007 1.5-2.1% in 07 but raised to 1.4-2.6% in 08, reflecting that inflation will likely moderate in Spring and Summer but rises again to near to 2% level near to the end of the year. After all, further rate hike is still expected from ECB in Q2, probably in June.

BoE kept rates unchanged at 5.25% as widely expected.


Daily Pivots: (S1) 1.3127; (P) 1.3157; (R1) 1.3204;


EUR/USD’s rebound from 1.3070 was limited at 1.3185, by 61.8% retracement of 1.3258 to 1.3070 at 1.3186. Subsequent sharp retreat indicates an intraday top is formed at 1.3185 and further retreat could now be seen towards 1.3108 support. But still, as long as this 1.3108 support holds, we’d expect the rebound from 1.3070 to extend further. Break of 1.3185/6 cluster resistance will encourage further rise to retest 1.3258 high.

However, break of 1.3108 will indicate that the rebound from 1.3070 is completed and will put this low back into focus again. And as discussed before, sustained break of 1.3078 cluster support (50% retracement of 1.2911 to 1.3258 at 1.3085) will warn that whole rebound from 1.2865 has already completed at 1.3258, after being limited by 78.6% retracement of 1.3364 to 1.2865 at 1.3257 with bearish divergence condition in 4 hours MACD and RSI. Also, that will complete a short term head and shoulder top too. Focus will then be back on 1.2939 support.

In the bigger picture, the corrective fall from 1.3364 has completed with three waves down to 1.2865. With EUR/USD staying within medium term rising channel (lower channel line at 1.2853 now), medium term up trend from 1.1639 is still in progress. Current rally is being treated as resumption of this up trend. Break of 1.3296 resistance will add more credence to this view and should push EUR/USD to a new high above 1.3364. However, a drop below 1.2939 will dampen this view and indicate rebound from 1.2865 is indeed a correction to the fall from 1.3364 only. That is, such correction from 1.3364 is still in progress and in such case, the rising channel line will be in focus again.

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