Daily Analysis - Subdued Trading will not Hold Back the Dollar!

[B]Economic News

Yesterday the greenback held firm at around 3-month highs against the JPY and surged towards the 1.3454 level versus the EUR as the currency is being supported by easing concerns about the outlook for the US economy. Dollar buying sentiment remains strong after recent indicators supported the view that the US economy is on the right track. The re-assessment of the US growth outlook is weighing down on US fixed income markets and this is providing the dollar with some extensive support.

After weeks of selling the dollar and buying the EUR, investors took advantage of a quiet day in terms of news flow to square off their positions. In particular, the chances of a rate cut in the US are considered less likely, whereas ECB rate hikes are already aggressively priced in, making the dollar now more attractive than the EUR in the short term.

Although there seems to be a positive outlook for the USD, this week is void of any significant news so trading will be subdued and the dollar is unlikely to post any sharp gains. We shall see this week a gradual and not a rapid dollar rise particularly verse the JPY. The only factor that could hold back the bullish dollar rampage is the growing risk appetite which will draw capital away from the US in search of higher yields.


In contrast with the US, where markets are becoming less convinced that a rate cut may be delivered, the European financial markets are already fully pricing in two more rate hikes and most of a third towards the end of the year. This has made any gains in the EUR very hard to eke out. Traders will be closely monitoring the ZEW and IFO German business confidence indicators which will be released tomorrow and on Thursday respectively. The ZEW expectations index is forecast to come in at 23.0 in May, a large improvement on April’s figure of 16.5. We believe that this figure will release positively and continue on its rising trend as the German GDP flash estimate released surprisingly stronger than expected last week. If the ZEW report comes out very strong the EUR may be able to get some reprieve from the current bear hold. The EUR meanwhile slipped back from its record high against the JPY as traders pocketed profits after the single currency’s recent rise into uncharted territory. After holding out at 163.62 against the Yen the EUR slipped to 163.45 and the EUR also took a dip against the dollar dropping from 1.3469 to the 1.3459 level.

Elsewhere, the Sterling’s performance was mixed, weaker against the dollar but higher against the yen. High money supply data released yesterday morning was partly offset by weaker mortgage approvals figures. The BoE is already widely expected to raise rates again in the coming months, so attention will be on the minutes on Wednesday, for a closer look at the logic behind their rate hike this month.


Today trading is expected to remain very calm as a result of the bare international economic calendar. The Japanese yen, which is the scape goat of the so-called carry trades, weakened against all the majors yesterday. It has touched three-month lows against the dollar and come off all-time lows against the EUR. In Japan, consumer prices due out on Friday are the main economic event this week with the market expecting a third straight fall. Nevertheless this expected fall has not changed the general sentiment of economists that there will be another quarter-point interest rate hike in the third quarter of 2007 and the BOE Governor Fukui also mentioned last week that rates could go up even if consumer prices keep falling. As a result of the empty international economic calendar the recent bearish momentum of the Yen is expected to continue until the end of the week.

[B]Technical News


After the last trading day, the volatility regarding the EUR/USD decreases, we expect that the bearish trend will continue to gather momentum also for today. EUR/ USD is in a downtrend directed by 1H exponential moving averages. 1H, 4H Elliott pattern implies that the EUR/ USD will continue to gather momentum. The price should continue to move downwards in a range of 1.3480 to 1.3400. 1.3475 seems like a strong entry point.


On the 4 H chart, a rising wedge (bearish) is forming which may imply a continuation of the bearish trend, it is recommended to time the entrance to the market with short term charts, 1.9738 seems like a strong entry point. At the moment GPB USD is being traded around 1.9765 to 1.9700 range. The volatility is low, we should expect to also see today bearish pressure on the GBP


The USD/JPY broke 121.50 resistance. USD/ JPY is in an uptrend supported by 1H exponential moving averages. The volatility is low. Bollinger bands are tightened. We should expect to see today a bullish configuration. 1H, 4H Elliott pattern imply that the USD/JPY will continue to gather momentum. The target is expected at 121.90


The USD CHF is in a bullish 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 bullish pressure. The uptrend should continue, and the expected target is 1.2370.

[B]The Wild Card[/B]


Forex traders should be aware that 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 however its not a classic pattern and therefore need to be caution is needed on this kind of move

Written by FOREXYARD