This week’s market movers
Finally, the Fed has paused its tightening cycle and left rate unchanged at 5.25% last week, ending a record 2 year fun of 17 consecutive rate 25bps rate hikes that started in Jun 04. Even though inflation risk remains, the Fed expects moderation in growth, with is a result of past monetary policy, to eventually contain the inflationary pressure. However, instead of continuing previous week’s NFP meekness, dollar remains firm after FOMC and rebounded further on narrowing trade deficit, record export and surprising strong retail sales data.
While, initial firmness on dollar after FOMC could be due to cover-on-news profit taking, the later on strength in dollar was probably due to speculation that the Fed has just ‘paused’ but not ‘stopped’ the tightening cycle. Growth moderation and inflation remain the main focal points. The questions are whether growth will continue to moderate and will such moderation finally curb inflation as fed expects. The upcoming data will be even more market moving, in particular, growth data. Any new piece of information that indicates the US economy is not slowing as much as expected will continue to provide further dollar support even though inflation doesn’t worsen.
Next week’s focus will include housing data, empire state and philly fed index, industrial production and capacity utilization as well as PPI and CPI inflation.
It was a rather quiet week in the Eurozone as market is overwhelmed by focuses elsewhere. Focus next week will be on Germany and Eurozone GDP and more importantly, inflation data on Thursday.
The BoE inflation report last week basically suggests that the surprise 25bps rate hike was not a one-off event as it’s clearly saying that with interest rate at 4.75%, it will be a challenge to meet the inflation target. Inflation and growth forecasts were revised upward and expects that inflation could reach as high as 3.0% by end of 2006. However, the BoE has no pressing need to raise rate again in the near term yet.
Sterling remains steady throughout most of the week but was pressured towards the end by broad based dollar strength and news U.K. police foiled a plot to blow up airliners bound for the U.S. in a series of terrorist bombings that might have been deadlier than the Sept. 11 attacks.
Next week’s economic calendar of UK will be busy with inflation data, employment, retail sales as well as BoE meeting minutes.
The Japanese yen continues to be pressured on rate outlook and dropped to record low against Euro to 148.58 last week. BoJ has kept interest rate unchanged at 0.25% on unanimous vote. Moderation in growth as shown by disappointing Q2 GDP has also put additional pressure on the Yen. Focus will be on the BoJ meeting minutes on hints of whether BoJ will have another hike within this year.
With recent expectation of further rate hike from RBA, market will be focusing on Governor Macfarlane’s comments as he speaks in House Economics Committee. In additional, Q2 wage cost index and RBA monthly Bulletin will also be closely watched this week.
USD/JPY
USD/JPY’s rebound from 113.96 extended last week and rose to as high as 116.43 towards the end of the week meeting initial target of 61.8% retracement of 117.87 to 113.96 at 116.38. Initial bias for this week will remain on the upside as long as USD/JPY stays above 115.60 resistance turned support and Firm break of 100% projection of 113.96 to 115.73 from 114.66 at 116.43 will encourage further rise towards 117.39 resistance.
Touching of 115.60 will turn intraday outlook consolidative first. But still, it will take a break below 114.66 to indicate the whole rebound form 113.96 has finished, otherwise, risk remains on the upside.
In a bigger picture, the whole rally from 108.99 has completed with a medium term top formed at 117.87 already with bearish divergence condition in daily MACD and RSI and medium term rising trend line firmly broken. However, USD/JPY will be treated as in larger sideway consolidation only as long as it’s kept above 113.39 cluster support and further rally is still in favor, only happens later, towards 118.88 resistance. Break of 117.39 resistance will be the first signal of medium term rally resumption.
But, firm break below 113.39 will start to argue that the whole decline from 121.38 (which made a low with three waves down to 108.99) has resumed and medium term outlook will be turned bearish for a test of 111.31 low first and possibly 108.99 later.
Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY) here.
Shing-Ip Tsui is the founder and CEO of
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