12/06/'07 - Dollar on the War Path!

[B]Economic News[/B]


The dollar strengthened at the end of last week on news of rising bond yields, which lessened the chances of a Fed rate cut which may be the trigger for the correction after last week’s aggressive strengthening of the greenback.

Lower interest rates, used to jump-start the economy, can undermine a currency direction by making investments denominated in its currency less attractive. A significant narrowing of the U.S. trade deficit in April further boosted the dollar last week. Traders are scrutinizing economic data closely for pointers to the Fed’s future course, and inflation figures due Thursday and Friday could help move the dollar. Today, the Labor Department releases its producer price index and on Friday the consumer price index is due to be out. The dollar was little changed against Japan’s currency, edging up to 121.77 yen from 121.74 yen after slipping to as low as 121.50 yen during Monday’s session.

Generally speaking, the dollar should remain strong for the coming two weeks as there is still quite a bit of steam left.


The Italian Industrial Production numbers for April followed the lead of Germany, collapsing by -0.8% MoM and +0.8% YoY however with not significant impact on the market. After looking as if there had been a degree of moderation in U.K. house prices the DCLG reported they had seen a rise of 11.3% YoY in May, up from 10.9% in April. This is above forecasts of 11.0% and keeps the upward pressure intact. However, unless there is any upturn in inflation figures interest rates will probably remain stable for the present.

Indeed, the prospect of higher inflation is still a threat with the PPI figures for May showing a +1.2% MoM and +1.2% YoY gain. The monthly number was forecast to only rise by around +0.6% though the annualized figure was reported only just above the 1.0% forecast. These numbers will be enough to prick up the ears of the BOE who will not want a repeat of March’s requirement to send a letter to the Treasury to explain why the CPI was above 3.0%.So far their forecasts appear to be on track, but this time their nerves may be strained if there are more figures pointing to renewed upward pressure.

Finally, on a very quite day, Trichet presented testimony to the European parliament and provided the normal, oft repeated comments of a strong economy, accommodative policy and favorable financing conditions. The target is for stable growth without inflation but highlighted the continued upside risks to inflation. On questioning he stated very clearly that he has never used the word ‘pause’ when relating to rate hikes. This, it would appear, is a clear sign of continued rate hikes which will maintain the EUR currency’s strength over time. Later on we will see the U.K. CPI & PPI along with the Euro-zone Industrial Production for April. I can’t see this generating too strong a move and more likely we shall see the pullback from Friday’s Dollar rally deepen a little further. However, this should allow better buying levels for the EUR.


The wholesale goods price index jumped 2.2% in May from a year earlier, rising for the 28th consecutive month, the Bank of Japan said.
The year-on-year gain was more than the market’s consensus forecast for a rise of 2.1%. Month-on-month, the index was up 0.5%. In April, the index increased by a revised 2.3% from the year before and was up a revised 0.9% from the previous month. The export price index in May, in contract currency terms, rose 1.4% year-on-year following a revised gain of 2.2% in April. Month-on-month, the export price index edged up 0.4% after rising a revised 0.4% in the previous month.
The import price index, in contract currency terms, jumped 5.0% last month from a year earlier, against a 6.3% increase in April. Month-on-month, the import price index increased 2.4%, following a revised rise of 2.3% in the previous month.

All those figures generally imply JPY recovery, however this recovery is a minor one and with no major move, little should be expected.
Asia sees the Japanese Domestic Corporate Goods Price Index which the BOJ is praying will show stronger price indications which will help lift prices. However, the Yen has remained pretty much range bound for some while and it’s difficult to see there being any move beyond 100 points from current levels in the near term.

Technical News[/B]


On the 4 H chart we notice that the bearish trend is running a head. The volatility has decreased and the EUR/USD is consolidating after it broke the 1.3420 support level. The price should continue to move downwards in a range of 1.3315 to 1.3450. As it seems, the bearish pressure will continue to gather momentum on the EUR/USD also today.


On the 4 H chart, a declining wedge (bullish) is forming which may imply a continuation of the bearishness. It is recommended to time the entrance to the market with short term charts, 1.9680 seems like a strong entry point. At the moment GPB USD is being traded around 1.9660 to 1.9750 range. The volatility is low and we should expect to see today more bearish pressure on the GBP. The downtrend should continue on to the 1.9610 resistance.


Since the USD/JPY broke the 121.65 support level, this pair is trading around the same level. The pair is in a downtrend supported by 1H exponential moving averages. The volatility is low. Bollinger bands have tightened. We should not expect to see any dramatic moves on the USD JPY, and the pair should continue to consolidate also today. 1H, 4H Elliott pattern implies a continuation of the USD JPY to gather momentum. The target is expected at 121.10


The USD CHF is in a bullish configuration. The volatility decreased and the pair is in a consolidation pattern since broking the 1.2386 resistance level. USD/CHF swings around exponential moving averages (EMA 50 and 100). Bollinger bands have tightened. 1H, 4H Elliott pattern implies a continuation of the bullish pressure. The target is expected at 1.2410

The Wild Card

On the 4 H chart we notice that the bearish trend is running a head. Foreign currency traders take note: the volatility decreased and the EUR/GPB is in a consolidation pattern since it has broken the 0.6780 support level. The price should forex continue to move downwards in a range of 0.6750 to 0.6800. As it seems, the bearish pressure will continue to gather momentum today.