Weekly Outlook: Could Q2 GDP Save the Dollar?
Action Insight | Written by ActionForex.com | Jul 21 07 21:38 GMT |
Forex Weekly Review and Outlook Could Q2 GDP Save the Dollar?
Dollar weakened across the board after a busy week. Bernanke’s semi-annual testimony and FOMC minutes came and went without much impact. Indeed, the major dollar mover was still the concern of subprime mortgage problems which sent the greenback to another record low against Euro on Friday. On the other hand, the Japanese rode on risk aversion and staged a strong rebound. The high yield currencies, including Sterling, Aussie and Kiwi, continued to strengthen against the greenback, making new decade highs. Technically speaking, dollar should be near to forming a short term bottom as its now oversold against most pairs and it could very much depend on the Q2 GDP to be released this week on whether dollar could have a meaningful recovery.
Prev Week’s High Prev Week’s Low Prev Week’s Close Last Week’s High Last Week’s Low Last Week’s Close Change (pips) Change (%)
EURUSD 1.3813 1.3593 1.3780 1.3842 1.3751 1.3826 46 0.33%
GBPUSD 2.0366 2.0094 2.0341 2.0586 2.0321 2.0560 219 1.08%
USDCHF 1.2193 1.1984 1.2025 1.2064 1.1959 1.2006 -19 -0.16%
USDJPY 123.66 120.97 121.92 122.42 120.86 121.29 -63 -0.52%
USDCAD 1.0610 1.0442 1.0474 1.0495 1.0399 1.0486 12 0.11%
AUDUSD 0.8715 0.8562 0.8709 0.8832 0.8691 0.8800 91 1.04%
NZDUSD 0.7876 0.7713 0.7871 0.7990 0.7851 0.7972 101 1.28%
EURJPY 168.94 166.51 168.03 168.86 167.19 167.68 -35 -0.21%
EURGBP 0.6797 0.6750 0.6774 0.6778 0.6713 0.6723 -51 -0.75%
EURCHF 1.6604 1.6519 1.6573 1.6632 1.6523 1.6603 30 0.18%
GBPJPY 248.95 245.07 248.00 254.09 247.57 249.37 137 0.55%
GBPCHF 2.4553 2.4308 2.4461 2.4757 2.4404 2.4689 228 0.93%
AUDJPY 106.34 103.76 106.18 107.70 105.90 106.76 58 0.55%
Standard & Poor’s cut ratings on European collateralized debt obligations on Friday and gauges of investor appetite for corporate bonds and loans fell. Ten year bond yields broke below the psychologically important 5% mark while Dow had a triple digit loss on Friday. Both triggered sharp selling in the dollar and buying in the Japanese yen on risk aversion.
In his semi-annual testimony, Bernanke indicated that there must be sign of sustained moderation before Fed consider dropping the tightening bias and the current benign report could be just a transitory effect. But still, underlying inflation pressure should abate in the coming months. The most notable message was that real GDP growth is expected to be between 2.25% and 2.50% this year, which is slightly below Fed’s Feb projections. Also, Bernanke argued that conditions in the subprime mortgage market have deteriorated significantly.
The FOMC minutes released last week basically echoed the themes in Bernanke’s testimony. Even though the downside risk to the economy is a bit diminished, the members are deeply concerned about housing and the potential for spillover. Also, they sounded less confident on consumer spending. On inflation, they acknowledged recent improvements in key pricing metrics but are still concerned that moderation is not convincing enough to alter the balance of risk yet. Also, the rise in headline inflation is perceived to be a threat to inflation expectations. Generally speaking, there isn’t much happenings that change the Fed’s stance yet and FOMC will like remain sideline for some considerable period of time.
On the data front, CPI stayed unchanged at 2.7% yoy in Jun, which was above consensus expectation of 2.6%. Meanwhile core CPI stayed unchanged at 2.2% too. The report suggest that inflationary pressures remain broadly under control but there is little evidence for the Fed to relax from its tightening bias yet. Even though headline PPI in US slowed more than expected to 3.3% yoy, core PPI accelerated to 1.8% vs exp of 1.6%. The data provided further support for the Fed to hold the fed funds rate steady at 5.25% in the near term considering that further moderation in inflation would likely be seen with below-potential growth and further slowdown in the housing sector.
The New York State Manufacturing Index defied critics once again in Jul and rose to 26.46, reaching a one year high, and being much better than expectation of a fall to 18.0. However, Philly Fed index dropped sharply from 18.0 to 9.2, vs expectation of 13.3. Even though building permits fell to fresh 10-year lows of 1.406m annualized rate in Jun, which is much lower than expectation of 1.48m, housing starts provides a breather as it rebounded from a downwardly revised 1.434m in May to 1.467m in Jun, which is slightly about expectation of 1.46m. TIC capital flow rose to fresh record high of $126.1b, much higher than expectation of $70b.
Germany’s ZEW was a big disappointment last week, nose-diving from 20.3 to 10.4, much worse than expectation of 21. The index peaked in May at 24.7 and has been deteriorating since then. The drop in business confidence highlighted the risk that current rise in the Euro, in particular against dollar and yen, are starting to weigh on export driven manufacturing economy and domestic demand to import.
The BoE minutes revealed that it moved the base rate upward by a quarter point to 5.75% at the conclusion of its Jul meeting, voting 6-3 to hike rates, inline with market consensus. Six members of the committee (including the Governor Mervyn King, John Gieve, Kate Barker, Tim Besley, Andrew Sentance and Paul Tucker) voted in favor of the proposition. However, the minutes suggested that there is no particular urgency, even among the hawks, to have another rate hike in the near term. Even though markets still expect another quarter point hike to 6.00% before the end of the year, the timing will likely be in Q4 and the odds for another one to 6.25% is not that high at this point. Though, the next quarterly inflation report on Aug 8 could still change this expectation.
Sterling remained generally firm during the week. There were some jitters after release of UK retail sales data which showed growth slowed more than expected in Jun. Growth in retail sales dropped form 0.4% mom to 0.2% mom, dragging yoy rate from 3.9% to 3.4%, which is a touch lower than consensus of 3.5%. However, Sterling bulls jumped in again after stronger than expected Q2 GDP report which shows 0.8% qoq, 3.0% yoy growth, comparing to expectation of 0.7% qoq, 2.9%yoy.
The Kiwi surged after higher than expected inflation data. While Q2 CPI moderated to 2.0% yoy, which is in the middle of RBNZ’s 1%-3% target range, the reading is higher than expectation of 1.8%. Also, the 1% qoq rise in CPI, which accelerated from 0.5% in Q1, signaled that another rate hike could be required from RBNZ to contain the increasing inflationary pressures in New Zealand. Both Aussie and Kiwi were supported by carry trading flows last week but the respective yen crosses was much pressured on Friday as Yen rebounded strongly on risk aversion.
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The Week Ahead
The development of subprime mortgage problems in US will likely remain the focus this week which could cause much volatility in both the dollar and the yen. On the data front, the most important piece of data will be Q2 GDP, which is expected to show sharp rebound from 0.7% to 3.5%. Meanwhile, more housing data from US, including existing home sales and new home sales will be released. Durable goods orders will be featured too.
In Eurozone, Germany Ifo index will be the most anticipated data, in particular after last week’s disappointment in ZEW. Japanese data will focus on the national CPI which is expected to show the Japanese economy is not clearly out of deflation yet. Some house prices data will be released in the UK while from Switzerland, KOF leading indicator will be the focus.
RBNZ is expected to have another 25bps hike to bring the OCR to 8.25% this week after higher than expected Q2 CPI. Both Q2 PPI and CPI from Australia will be released this week. The CPI is expected to moderate further from 2.4% yoy to 1.9% and such data will reinforce the expectation that RBA is in no hurry for another hike. Canadian dollar will look into May’s retail sales data for the momentum to make another high against the dollar.
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- «www.actionforex.com» EUR/USD
EUR/USD’s upside momentum is seen diminishing after it touched mentioned target of 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. Though, it still managed to break to new record high of 1.3842 on Friday. From a short term angle,we’d like to emphasize that a short term top should be around the corner with overbought condition in both daily and weekly RSI. As well as mild bearish divergence condition in 4 hours MACD and RSI. However, a break of 1.3778 support, which should also have short term rising channel (support at 1.3795) taken out, is needed to confirm a short term top is formed. Otherwise, further rally is still in favor. Below 1.3778 will encourage pull back to 4 hours 55 EMA (now at 1.3757) first, break will bring further fall towards support zone between 1.3567 and 1.3658.
In the bigger picture, the current development dampened the original view that rise from 1.3262 is the last advance in a five wave structure that started at 1.2483. Firstly, the current momentum of the rise from 1.3262 is seen stronger than the prior rally from 1.2865 to 1.3681. Secondly, the falling trend line in both daily MACD and RSI were broken, negating the bearish divergence conditions. In other words, the underlying bullishness in EUR/USD could be much stronger than we originally thought.
Focus remains on 1.3822 resistance. Sustained trading above this level will add much weight to the case that whole medium term rally from 1.1639 is indeed resumption of multi-year up trend from 0.8223 (00 low). That is, further rise should be seen in medium term towards 95 high of 1.4523 with much chance to extend further to 61.8% projection of 0.8223 to 1.3668 from 1.1639 at 1.5004.
On the downside,as long as 1.3481 support holds, any pull back will still be treated as correction to rally from 1.3262 only and another rise is still in expected after completion. However, break will put 1.3262 low into focus. And break will indicate that medium term rally from 1.1639 has likely completed after being limited by 1.3822 resistance as originally expected.
GBP/USD
Cable had another strong rally last week and surged to as high as 2.0586, meeting mentioned target of 100% projection of 1.9183 to 2.0132 from 1.9621 at 2.0570. From a short term angle, further rise is still is expected as long as 2.0481 support holds. Next will be medium term target of 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677. However, a short term top could be around the corner with overbought condition being displayed in both daily and weekly RSI. Upside of the current rally could be limited between 2.0570 and 2.0677. Below 2.0481 support will indicate that a short term top is likely formed and bring pull back to inner rising trend line (now at 2.0296) or lower.
In the bigger picture, the sustained break of 2.0207 projection target confirms underlying upside momentum is still strong. Also, it added much credence to the case that whole up trend from 1.7047 is resumption of multi-year up trend from 1.3680. In such case, further rally should then be seen to 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677 first. Sustained trading above 2.0677 will target 2.1 psychological resistance.
On the downside, in case of a pull back, downside should be contained by support zone between 2.0056 and 2.0206 and bring another rally. Break of 2.0056 will suggest that lengthier consolidation will come first with the prospect of another test the medium term rising trend line (now at 1.9794) But medium term outlook will be neutral at worst at long as 1.9621 support remains intact.
USD/CHF
USD/CHF edged lower to 1.1960 last week initially but failed to sustain below mentioned 1.1993 cluster support (61.8% projection of 1.2467 to 1.2089 from 1.2232 at 1.1998) and turned into consolidation. Subsequent recovery was limited by 4 hours 55 EMA and inner falling trend line. USD/CHF weakens again on Friday. From a short term angle, the brief break of 1.1987 support indicates that corrective rise from 1.1960 has completed and retest of 1.1960 low should now be seen. However, since a short term bottom is likely in place with bullish convergence conditions in 4 hours MACD and RSI, firm break of 1.1960 is needed to confirm fall from 1.2467 has resumed. Otherwise, another rebound could be seen before completing the consolidation.
In the bigger picture, USD/CHF has likely completed a medium term triangle consolidation already, which started at 1.1919 with five waves to 1.2467. Firm break of 1.1993 will confirm this case. 1.1878 (06 low) will be the initial target. And since, in such case, fall from 1.2467 is viewed as resumption of medium term down trend from 1.3283, further weakness should be seen to 100% projection of 1.3283 to 1.1919 from 1.2768 at 1.1404, with much chance to extend to retest 1.1288 (04 low).
On the upside, break of 1.2232 resistance will mess up the short term picture a little bit. In such case, chance is swung to the case that the triangle consolidation indeed started at 1.1878. In other words, the overall outlook didn’t change and just that another rally should be seen before completion. Hence, even in such case, upside should be limited below 1.2467 high and bring another medium term decline.
In the longer term picture, based on the above interpretations, outlook will remain bearish as long as USD/CHF stays below 1.2467 resistance. Down trend from 1.3283 should extend further to retest 1.1288 (04 low) after finishing the current medium term consolidation. However, a strong break of 1.2467 will dampen this view and turn the long term outlook mixed again.
USD/JPY
USD/JPY was bounded in choppy range trading below 122.60 resistance last week and fell sharply on Friday, reaching as low as 120.83, breaking prior low of 120.96. From a short term angle, the fall from 124.13 should still be in progress and further decline should be seen to 120.76 cluster support (38.2% retracement of 115.13 to 124.13 at 120.70). Above 122.40 resistance is needed to indicate corrective fall from 124.13 has completed. Another another decline is still in favor even in case of another recovery.
In the bigger picture, rise from 115.13 has made a top at 124.13 and turned into consolidation since then. But still, rally from 108.99, which is treated as resumption of whole up trend from 101.66, is in progress. Even in case of a deeper correction, downside is expected to be contained by 118.35/57 cluster support zone (38.2% retracement of 108.99 to 124.13 at 118.35 and 61.8% retracement of 115.13 to 124.13 at 118.57) and bring rally resumption. Next medium term upside target will be resistance zone of 100% projection of 101.65 to 121.38 from 108.99 at 128.72 and 100% projection of 108.99 to 122.17 from 115.13 at 128.31. However, break of 118.35/57 cluster support argue that rise from 108.99 has possibly completed and put 115.13 low into focus.
In the longer term picture, note that USD/JPY is staying comfortably above the long term falling trend line (147.68 to 135.20). Multi-year consolidation pattern that started from 147.60 should have already completed. But, whether current rise from 101.65 represents the resumption of whole up trend from 79.75 remains to be seen. Note that above mentioned medium term projection target of 100% projection of 108.99 to 122.17 from 115.13 at 128.31 and 100% projection of 101.65 to 121.38 from 108.99 at 128.72 are in proximity to 78.6% of 135.20 to 101.65 at 127.95. This cluster resistance zone will be important to determine the long term trend.
EUR/JPY
EUR/JPY failed to take out 168.93 again last week and instead, weakened sharply on Friday on broad based yen strength. Break of 168.09 support and the inner rising trend line (now at 168.17) indicates that a short term top should be in place at 168.93 on bearish divergence condition in 4 hours MACD and RSI. Even though the decline is initially supported by 167.13/17 (23.6% retracement of 161.49 to 168.93 at 167.17 and 38.2% retracement of 164.23 to 168.93 at 167.13), further fall is still in favor as long as EUR/JPY stays below 168.86 resistance. Break of 167.13/17 will encourage a retest of short term rising trend line (now at 165.61).
In the bigger picture, whole medium term rally from 130.60 is still in progress and the interpretation remains unchanged. First wave up ended at 143.60, subsequent correction ended at 137.167. The third wave up ended at 159.63 while fourth wave correction has ended at 150.75. Rise from there represents the final advance in this structure. With 61.8% projection of 137.16 to 159.63 from 150.75 at 164.64 taken out decisively, next medium term upside target will be 100% projection of 137.16 to 159.63 from 150.75 at 173.22. However, break of the short term rising trend line support (now at 164.77) will dampen this view and indicate that the rise from 150.75 has possibly completed earlier then we thought, with bearish divergence condition in daily MACD and RSI. Medium term trend line support (now at 155.67) will then be put into focus. In the longer term picture, regardless of the internal structure, rally from 88.97 has now taken out key resistance level of 162.42 and 38.2% retracement of 285.56 (79 high) to 88.97 (00 low) at 164.07. Next important long term resistance will be at 188.22 (90 high) and 50% retracement of 285.56 to 88.97 at 187.27.