06/06/'07 - Will the ECB hawk spread its wings?

[B]Economic News[/B]


Yesterday the USD continued on its bearish path and it extended its losses against the EUR and the sterling. Comments made by the Federal Reserve chairman Ben Bernanke that a slowdown in housing construction will be a drag on economic growth �somewhat longer’’ than expected was the main driver of the dollar selling momentum . He added that the housing slump hasn’t spilled over into other parts of the economy, and he maintained a forecast for ``moderate’’ growth. These comments were seen as slightly dovish by investors as this positive attitude indicated to the market that the Fed will not hike or cut rates in the near future. The other major cause for the slide of the greenback is the speculation that the European Central Bank and the Bank of England will signal higher interest rates at meetings this week, increasing the value of local currencies. Also it was reported yesterday that the ISM Non-Manufacturing index rose to 59.7 from 56.0 in April, beating expectations for a second straight reading of 56.0. This news had a significant impact is it provided more momentum for the dollar to rally and the currency moved to day highs against the sterling and firmed against the EUR, although it remains close to recent lows. Today the dollar movement will pegged to the EUR as all attention shifts to the ECB interest rate statement and the press conference that will follow it. If the ECB maintains its hawkish stance the dollar will be firmly in a bear hug with little hope of an imminent recovery and the bearish trend will continue at least until the end of the week.


Yesterday it was reported that Euro zone retail sales for April were up 0.2% from March, missing expectations for a 0.9% rise following March’s 0.5% gain. This much weaker than expected data nonetheless paves the way for retail sales to be stronger in the second quarter than in the first. Also the May PMI survey of the Euro zone’s services sector came in just above expectations at 57.3, while the pricing measure eased to a five-month low of 53.1. Both of these data releases had minimal impact on the bullish surge of the EUR, as the currency is being driven by expectations of a rate hike which will be announced today at 11:45 GMT. However a rate increase to 4.0% is almost definite following a series of strong European economic figures and has already been priced in by the market, so all attention will be focused on the press conference with ECB president Trichet that will follow. Traders will be on the lookout for hints about future policy from president Trichet and many believe that a further rate hike may occur as early as September. The ECB differs from other central banks in its policy making as in addition to inflation and growth they focus on M3-which is the broadest gauge of money supply. In their view, too much money in the system is inflationary and that has been their view since the start of the Euro in 1999. Although inflation is now sitting at 1.9%, one tenth of a percent below the bank’s 2.0% target, the rate of growth in M3 is likely to keep Mr. Trichet sounding hawkish, especially given the very optimistic growth outlooks and the risks to inflation that higher energy prices, high resource utilization and a lower unemployment rate now pose.

It is highly unlikely that the ECB will spring a surprise but if they do traders can expect sharp movement in the EUR. The more likely scenario today is a rate hike to 4.0% which will have little impact on the EUR but hawkish comments by Trichet will keep the currency on its bullish path.


Yesterday the JPY extended its gains against the greenback and the EUR and nearly all of the yen crosses were either down or unchanged. The JPY strength was driven by concerns that the demand for riskier assets may decline with central banks in Europe and Asia likely to raise rates in the coming months. The Dow was also down 80 points yesterday and we can see that the correlation between the yen and the US equity markets remains very high as it is a primary determinant for risk appetite. The JPY rebounded from a record low against the EUR as investors shied away from the so-called carry trades and the currency also rose from 15 year lows against the British pound, the Australian dollar and the New Zealand dollar. Although it seems that investors may be starting to shy away from carry trades we may have not seen the end of them just yet as the BoJ is in no haste to hike Japan’s benchmark interest rate, which at 0.5% is the lowest among major economies thus encouraging carry trades. No Japanese market moving data will be released for the rest of the week so JPY movement will pegged to the performance of US and Chinese stock markets.

[B]Technical News [/B]


On the 4 H chart we notice that the bullish trend is running a head. The volatility decreases and the EUR USD is in a consolidation after it has broken the 1.3505 resistance level. The price should continue to move upwards in a range of 1.3510 to 1.3610. As it seems, the bullish pressure will continue to gather momentum on the EUR USD also today.


On the 4 H chart, a rising wedge (bullish) is forming which may imply a continuation of the bullish carry trade, its recommended to time the entrance to the market with short term charts, 1.9970 seems like a strong entry point. At the moment GPB USD is being traded around 1.9915 to 2.0000 range. The volatility is low, we should expect to see also today a bullish pressure on the GBP. The uptrend should continue on 2.0050 resistance.


The USD JPY broke 121.40 support. USD JPY is in a downtrend supported by 1H exponential moving averages. The volatility is low. Bollinger bands are tightened. We should expect to see also today a bearish configuration. 1H, 4H Elliott pattern implies that the USD JPY will continue to gather momentum. The target is expected at 120.60


The USD CHF is in a bearish configuration. The volatility decreases. USD CHF moves without trend and swings around exponential moving averages (EMA 50 and 100). Bollinger bands are tightened. 1H, 4H Elliott pattern implies a continuation of the bearish pressure. The target is expected at 1.2050

[B]The Wild Card

On the 4 H chart, the 5 Elliott pattern can be observed and the A,B,C is to be formed, in this case the C wave is expected to make this pair consolidate at 163.60. Forex traders beware: its not a classic pattern and therefore caution is needed on this kind of move.

The recent increase in long-term U.S. interest rates might have as much to do with events abroad as it does with events at home.

Overseas economies have remained strong despite the U.S. slowdown. That has stoked inflation worries abroad, which in turn is helping to push interest rates higher and keep pressure on central banks. Higher rates tame growth and inflation.

This week, both the European Central Bank and the Bank of England are conducting rate-setting meetings. The ECB is widely expected to raise its euro-zone target rate to 4% from 3.75% when it meets tomorrow. Interest-rate futures show investors expect at least one more rate increase by year end. Britain’s central bank is expected to keep rates on hold at 5.5% when it meets Thursday, but it may signal that it plans to raise rates again as early as next month.

I think GBP/USD might cross 2 sometime in the near future.