Volatile Markets after PPI, Dollar Risk on the Downside
After earlier losses to Euro, dollar recovers in early US session after much stronger than expected PPI which increased 2.0% mom in Nov, beating expectation of 0.5% and pushed yoy growth back to positive at 0.9%. Core PPI is also strong, growing 1.3% mom, 1.8% yoy versus consensus of 0.2% and 1.1%. Housing data was mixed with housing starts rising more than expected to 1.59m annualized rate in Nov while building permits dropped more than expected to 1.51m.
Despite the recovery in greenback, since technically speaking, a top is formed against majors, further weakness in dollar is still in favor against European majors. Though, Dollar should still be firm against the Japanese yen.
Euro was boosted earlier by stronger than expected Germany Ifo Business CLimate Index that climbed to 108.7 in Dec, highest since 1990, far above expectation of 106.8. Such strong reading suggest that current business situation and forward looking expectations were more confident despite the anticipated increase in VAT. This is supportive to ECB to have another hike in Q1 07, probably in March.
The Japanese yen remains pressured today and dropped to near to record low against Euro after dovish comments from BoJ Governor Fukui who said that inflation and consumer spending in Japan are “somewhat weak”, suggesting the BoJ will keep rates unchanged beyond Jan 07. Weakness in yen, in particular, in crosses, has given European currencies a lift that translated into euro’s strength early against dollar before the Ifo announcement.
Daily Pivots: (S1) 1.3059; (P) 1.3088; (R1) 1.3126; More
EUR/USD rebounds strongly today, reaching as high as 1.3174 so far, touching 4 hours 55 EMA (now at 1.3172). As discussed before, break of 1.3117 resistance has completed a head and should bottom formation, with 4 hours MACD recovered back to above signal line too, bias is shifted back to the upside.
At this point, as long as EUR/USD stays above 1.3082 support, further rally should follow towards 1.3186 resistance. Break will indicate the whole corrective fall from 1.3362/64 has completed and should bring retest of this high. However, decisive break of 1.3364 high is needed to confirm rally from 1.2483 has resumed for next upside target of 1.3668 (04 high). Otherwise, consolidation may extend further.
On the downside, below 1.3082 will encourage a retest of 1.3051 low. But still, since price actions from 1.3362 are treated as consolidation to rise form 1.2076 only, downside is still expected to be contained above 1.2911/38 support (50% retracement of 1.2483 to 1.3362 at 1.2923, 161.8% projection of 1.3364 to 1.3129 from 1.3291 at 1.2911) and bring another rally.
In the long term picture, the medium term rise from 1.1639 could either be resumption of this multi-year up trend or just part of a larger scale consolidation that started at 1.3668. But neither case is confirmed yet. Nevertheless, medium term outlook remains bullish with EUR/USD saying above 1.2760 support. Decisive break of 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822 will confirm long term up trend has resumed for 1.4 psychological resistance first. On the downside, break of 1.2760 support will turn medium term outlook neutral and argue that whole medium term rally from 1.1639 has possibly completed. Focus will be shifted by to 1.2483 key support and break will confirm this case and bring much deeper decline.
Shing-Ip Tsui 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.