Yesterday, the greenback continued on its downhill slide as further weak US data releases only exacerbated the recent vigorous dollar sell-off. The US Factory Orders figure released in negative territory at -0.5 %. Although this number beat the expected figure of -0.9 % it was still significantly lower than last month’s figure of 0.5 %. Also the Pending Home Sales figure came in lower than expected at -3.5%. On the back of this negative news the US currency dipped to 1.3633 against the EUR before settling back to the 1.3603 level and remains within sight of a record low as investors are awaiting any hint from the ECB of when a future rate hike will occur. The greenback also continued to range trade at 26-year-lows against the sterling dipping to the 2.0195 level and then stabilizing at 2.0166. The dollar weakening versus the GBP can also be attributed to expectations that the Bank of England will raise its key interest rate on Thursday to 5.75 %. The potential increasing interest rate and growth differentials between the US and Europe is putting significant pressure on the dollar. Also, a major driver of the dollar weakness are concerns about the subprime mortgage market as a slowdown in the housing market could leave the Fed with little option but to cut the interest rate. Today, the US financial markets will be closed because of the Independence Day Holiday so there will be low liquidity during the New York session and the USD should continue to range trade at its low levels as all key market players will exercise caution ahead of Thursday’s interest rate statements. After the announcement of these statements we may see the dollar begin to find some reprieve as attention will turn back to establishing when the Fed is likely to start adopting a softer stance for its monetary policy.
Yesterday, the European currency extended its gains against the dollar while remaining relatively stable against the rest of the majors. The bullish run of the EUR against the greenback can be mainly attributed to weak US data releases and the expectation of a European rate hike in September. The only significant data that came out of the Eurozone yesterday was the PPI that came out inline with expectations at 0.3% and the unemployment rate released at a slightly better than expected figure of 7.0 % which further helped boost the EUR.
Today, the only news expected out of the Eurozone is the Services PMI and Retail Sales figures but no major market movement is expected as attention shifts to Thursday’s interest rate statement and Trichet’s speech. The Eurozone interest rate is expected to remain unchanged at 4.0 % but traders will closely watch Trichet’s speech for an indication of when a future rate hike will occur to tame the EU’s inflation. They will lookout in particular for the use of the words �strong vigilance’ which will be a clear signal to the market that there will be a rate hike in September to 4.25 % and this will give the EUR another upward shove with the possibility of breaking its record high against the USD. So the European currency will continue to range trade today all across the board with the next stage of volatility expected to occur on Thursday.
The JPY was little changed yesterday against the greenback as it drifted from the 122.43 level to 122.32. The yen also gained ground all across the board on the back of comments by the BoJ member Nishimura that hinted towards a future rate hike. It is also believed by many investors that the Bank of Japan will raise its benchmark rate to 0.75 % by the end of September. Volatility will pick up again on expectations of a rate hike in September especially in the USD/JPY currency pair as a rate increase can lift the demand for JPY. Also an increased level of volatility may render carry trades to be too risky thus having a positive effect on the JPY and currently there seems to be greater demand to sell the greenback and to buy the JPY. There was no significant data released from Japan yesterday so we cannot attribute the JPY’s strength only to the hints of a future rate hike as investors were aware of other Japanese data releases that have indicated that the Japanese economy is not quiet ready for a rate hike in the near future. So it seems that a drop in carry trades was the main driver of the JPY strength and without any significant data to be released from Japan for the rest of the week the JPY will be influenced mainly by the demand for carry trades.
On the 4 H chart we can see a classic pattern of an opposite head & shoulders forming with a negative divergence. This pattern may signal that the market is gathering some new energy and another boost up after a consolidation period which is due to end. A Doji was established and after that a reversal took place. We are holding the thought that this pair will test the all time record high which is located at 1.3667 and may even determine a new one . Today going long will be the preferable strategy.
In the long term, we are assuming that the bullish trend is out of steam and a reversal is expected to take place in the next 3 days. However ,today this pair is expected to maintain its strengthening and will determine a new all time record . Going long in the short term is preferable however taking this kind of action requires caution to support for the upcoming reversal.
On the daily chart, a widening channel is observed and is currently testing the lower boundary ,if a breakout will occur the next barrier is located at 122.01 (61/8% Fibonacci retracement level),however if a breakout doesn’t take place, the next price target is 122.73 (78.4 % Fibonacci retracement level).
In the upcoming days we are expecting this pair to maintain its bearish behavior, however we are seeking a reversal, which still has not been observed despite the USD strengthening during the overnight session. This pair may test the 1.2187 level and then continue his bearish trend.
Going short looks preferable.
The Wild Card
A bullish channel is establishing on the daily chart and it seems that Oil still has room to strengthen before a reversal will take place. Forex traders should be aware that going long now may be a good move, but need to watch the market closely since the reversal is waiting to gather enough energy before taking place.