Daily Analysis - US Durable Goods and New Home Sales On Tap.

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Economic News

USD

Yesterday the greenback was mixed against most of the major currencies as investors sought to weigh US economic prospects amid hopes that the world's largest economy will pick up steam later this year. The USD strengthened slightly versus the JPY touching the 121.66 level, as a record intraday high for US stocks meant that carry trades were back in action, but the US currency lost some ground against the EUR falling to 1.3459 from Tuesdays 1.3447 level. Sentiment on the US economy has brightened in the past week following better-than-expected reading on jobless claims, a surprise rebound in new home construction and an unexpected strong rise in industrial production. Hence traders are buying back the dollar as they continue to digest this series of robust economic indicators. After two days of top-level economic talks in Washington, the US and China claimed to have agreed on the need for economic and currency reforms. Paulson said Chinese officials agreed with the United States that their economy had to be "rebalanced" to take on a greater role as a global consumer and cut Beijing's reliance on exports for growth. That would help reduce a U.S. trade deficit with China that hit an all-time high of $233 billion last year and ease tensions over China's economic success. The most significant deal announced yesterday was one that commits China to remove a bar on new foreign securities firms and resume issuing licenses for securities companies, including joint ventures, in the second half of 2007. This deal is important as Treasury Chief Paulson has made gaining greater access to the Chinese financial sector a key objective. However there still seems to be no agreement on the dispute over China's undervalued currency. In July 2005, China abandoned an 11-year-old practice of holding the Yuan fixed against the dollar and revalued it by 2.1%. Since then it has risen only a further 6%, frustrating U.S. legislators who claim an undervalued currency makes Chinese products unfairly inexpensive and therefore this hurts the ability of US exporters to compete on the global markets, leaving the US with limited options to shrink its trade deficit. Today we will finally see some significant news coming out of the US after a relatively barren news week. At 13:30 GMT the US Durable Goods Orders figures will be released as well as the Jobless Claims figure which is expected to rise to 305K from a previous figure of 293K. This news will be followed by the release of the new home sales figure at 15:00 GMT which is expected to improve slightly from 858K to 860K. If these figures disappoint we may see this week's fledgling dollar rally begin to crawl back into the bear cave and it seems that the dollar retracement may have already began yesterday as the USD only gained ground against the Yen but it slipped against all the other majors. So today's economic news will be a particularly key turning point for the USD.

EUR

Yesterday the Italian retail sales figure released at 0.5% beating the previous months figure and the expected figure of 0.2%. This positive news was a further indication of the ever strengthening Euro-zone economy and the EUR gained all across the board. The EUR was slightly firmer against the USD yesterday ahead of today's German IFO survey which will be the main EUR market moving data of the week. This survey measures the mood of firms in manufacturing, construction, wholesale and retail. The index is derived from a monthly survey of over 7,000 firms where respondents are asked to give their assessment of the current business situation and their expectations for the next six months. So unlike the German ZEW survey, which focuses more on the past, the IFO survey will give a better indication of how robust the European economy really is and whether this strength is sustainable in the future. If this survey releases surprisingly strong we will see the EUR resume its bullish rampage.

Elsewhere, the GBP gained all across the board yesterday after the BOE monetary policy meeting minutes for May showed all nine committee members voted to lift UK interest rates a quarter percentage to 5.50%. This marked the first time this year that the committee members unanimously voted to increase rates. Besides, the minutes revealed that some members even suggested an unprecedented 50 basis point increase in the meeting. The MPC minutes surprised the market that had expected an 8-1 vote. The sterling rose sharply from 1.9750 to 1.9880 versus the dollar. However there is still plenty of skepticism of whether the BoE will hike rates in the near future.

JPY

Improving prospects for interest rates in the US and the UK has given further impetus for the carry trades; this is where investors borrow money in countries with low interest rates in order to invest in higher-yielding assets elsewhere. So the JPY, which is the most common funding currency for carry trades due to the very low Japanese interest rates, came under fresh pressure reaching its lowest level since February against both the dollar and the pound. Also Japan's exports to the U.S. fell for the first time in two years, underscoring the nation's reliance on faster growing markets in Asia and Europe. Exports rose 8.3 percent in April from a year earlier, cooling from 10.3 percent in March. Shipments to the US dropped 4.8 percent, the steepest decline since May 2004. The Japanese market will be looking ahead to tomorrow's important CPI and core CPI figures. It seems that the Japanese consumer prices probably fell at a slower rate in April, signaling that inflation may turn positive again soon and allow the central bank to raise interest rates. The core consumer prices, which exclude fresh food, declined 0.1 percent from last year and according to estimates less than 0.3% drop in March. The BoJ Governor Fukui said last week that the central bank could raise interest rates even with prices falling, as long as policy makers are confident about the economic outlook. The consumer prices, which began falling in February, probably hit bottom in March and we should see improved CPI figures from now. This could provide the JPY with some relief from the persisting bearish trend that it has found itself trapped in.


Technical News

EUR/USD

The pair is rallying down for the last 3 weeks and touched the 1.3415 level yesterday. The hourly studies are in oversold territory, and a bullish cross has formed on the daily chart. A correction up might be in place with a target price of 1.3550.

GBP/USD

The Cable has already initiated the move up after the big slide from the 2.0100 levels, and is now showing the first distinct signals on the bullish side. Hourlies are bullish, and the dailies still have much steam in it.

USD/JPY

The uptrend for the pair could not be any clearer, and all studies indicate there is still plenty more room to run. The pair now floats on the bottom of the upwards channel, indicating a further move up is imminent.

USD/CHF

The pair is still in the middle of the uptrend initiated at 1.2000, and now shows signals of a correction. Dailies are bullish, and the hourlies are a bit overbought. Buying on dips might be a preferable strategy.


The Wild Card

EUR/GBP

The pair nose dived more than 150 pips in the last 4 days, and is now touching 0.6770 which is a strong local support. The dailies are turning bullish, and there is a very distinct bullish cross forming on the 4 Hour chart, allowing Forex traders a great opportunity to get in at a great low price and go long.

Written by FOREXYARD