Weekly Outlook: Dollar’s Risk on Downside in a Busy Week
Action Insight | Written by ActionForex.com | Feb 24 07 06:52 GMT |
Forex Weekly Review and Outlook Dollar’s Risk on Downside in a Busy Week
The Forex markets were dominated by the Japanese yen last week as BoJ finally raised rate. However, the yen fell sharply across the board since then on typical buy-on-rumors, sell-on-news price actions. Euro remains firm and broke to new record high in EUR/JPY cross. Meanwhile, we believe the most important development last week should be dollar’s sell off towards the end, partly on geopolitical concerns and partly due to position unwinding ahead of this week’s jam-packed economic calendar, which could be the signal on further weakness in the short term.
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 1.3171 1.2940 1.3141 1.3190 1.3081 1.3167 26 0.20%
GBPUSD 1.9675 1.9401 1.9503 1.9651 1.9428 1.9630 127 0.65%
USDCHF 1.2548 1.2331 1.2339 1.2435 1.2293 1.2330 -9 -0.07%
USDJPY 122.08 118.97 119.29 121.63 119.21 121.00 171 1.43%
USDCAD 1.1766 1.1617 1.1627 1.1714 1.1562 1.1590 -37 -0.32%
AUDUSD 0.7870 0.7708 0.7869 0.7921 0.7845 0.7918 49 0.62%
EURJPY 158.99 156.23 156.81 159.61 156.85 159.30 249 1.59%
EURGBP 0.6738 0.6646 0.6737 0.6756 0.6689 0.6706 -31 -0.46%
EURCHF 1.6286 1.6201 1.6219 1.6288 1.6195 1.6235 16 0.10%
GBPJPY 238.55 232.13 232.68 238.15 232.09 237.50 482 2.07%
GBPCHF 2.4422 2.4057 2.4069 2.4305 2.3975 2.4205 136 0.57%
AUDJPY 94.87 93.41 93.87 95.91 93.76 95.81 194 2.07%
Economic calendar in the US was light last week. Headline US CPI inflation matched market expectations with a 0.2% mom, 2.1% yoy rise in Jan. However, core CPI did come in higher than expected with 0.3% mom, 2.7% yoy rise. Core CPI has been slowing from last Sep’s 2.9% to 2.6% in Nov and stayed there in Dec. Jan’s acceleration to 2.7% could be an indication that core inflation’s down trend has bottomed out at 2.6%, which is still far above Fed’s comfort zone. That may force Fed to ‘restart’ the tightening cycle if core inflation continues to fail to moderate further.
FOMC minutes was basically a non-event, which replayed Bernanke’s testimony. Members were generally more confident that the economy could achieve moderate growth that will ease inflationary pressure gradually. However, some “participants did not yet see a downtrend in core inflation as definitively established.” Hence, the Fed will likely be on hold in 2nd half of the year but maintain a tightening bias in case that inflationary pressure re-emerges.
Despite surging higher against yen, dollar just managed to have a brief recovery against Euro on these news. Dollar started feeling the pressure on Thursday after UN’s International Atomic and Energy Agency announced that Iran has not only failed to suspend all nuclear activities by Thursday’s deadline, but has set up over 300 centrifuges for industrial enrichment. Dollar was sent further lower on Friday as traders closed positions on dollar ahead a a jam-packed economic scheduled this week, with much downside risk on durable goods, GDP revision, Jan PCE and ISM.
Euro shrugged off mixed data last week and broke to new record high against the Japanese yen, as well as rebounding against dollar. GDP growth in Germany was confirmed to be 0.9% qoq, 3.5% yoy, which was impressive. However, the strong growth was mainly attributed to upside surprise in export which accelerated from 4.5% to 6.0%. Domestic demand dropped -1.3% with, government consumption dropped -0.1% comparing to prior quarter’s 0.7% growth. This had given some pressure to the Euro. The German IFO index weakened slightly to 107.0 in Feb from 107.9 in Jan, which was slightly below market expectation of 107.5 even though it’s still solid.
BoJ finally raised rate by 25bp to 0.50% last week by an 8-1 vote with Deputy Governor Kazumasa Iwata as the lone dissenter. Though the hike surprised part of the markets, the Japanese yen fell sharply across the board after the rumor was confirmed. Also, BoJ’s tightening will still be slow, which was assured by the accompanying statement that it will “adjust the level of interest rates gradually in the light of developments in economic activity and prices, while maintaining the accommodative financial conditions ensuing from very low interest rates for some time.” Further yen selling was triggered by Fukui’s press conference saying that even though carry trades was one consideration for the hike, it’s not all, and unwinding of excessive market positions could hurt economy.
BoE minutes revealed that the decision to hold rate steady at 5.25% earlier this month was done by a margin of 7 to 2 vote, which was inline with consensus expectation. Tim Sentance and Andrew Besley voted in favor of an immediate rate hike. The arguments in favor of a rise included the upswing in near-term inflation expectations, rising producer price growth, as well as money supply and asset price growth. However, a majority of the voters believed that there was time for wait-and-see. The minutes also emphasized the downside risks to inflation due to volatility in energy prices. Together with the information from previous inflation data and BoE inflation report, it’s believed that even though another hike is still needed to bring down inflation to below BoE’s target rate of 2%, the MPC will continue the wait-and-see attitude and the timing will very much depend on the upcoming data.
Canadian dollar was pressured after Jan CPI data which showed headline inflation of 1.2% yoy and core inflation of 2.1% only, which is just slightly above BoC’s 2% target. However, Canadian dollar staged a strong rally against dollar after impressive Dec retail sales data which rose strongly by 2.3% rate comparing to 1.0% mom expectation. Ex-auto sales was equally strong with 2.0% mom rise comparing to 0.5% expectation. The loonie was further supported by rise in oil prices.
The Aussie dollar was boosted by RBA Governor Stevens’ comments that a further increase in interest rates was still more likely than a cut. The Aussie was supported further by carry trade against the yen and higher gold prices.
Suggested Readings:
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/yen_carry_trade%3a_another_look_2007022217739/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/fx_briefing%3a_the_week_of_the_carry_traders_2007022317789/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/the_bank_of_japan_hikes_rates_again_2007022117669/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/japan%3a_a_very_pre-emptive_hike_from_boj_2007022117640/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/dollar_reverses_gains_after_iran_statements_2007022217735/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/fomc%3a_a_replay_of_bernanke%27s_testimony_2007022217705/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/economic_indicators%3a_consumer_prices_rise_slightly_more_than_expected_in_january_2007022117676/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/usa%3a_a_reminder_on_inflation_2007022117667/ The Week Ahead
The coming week should be an important week for the dollar in short term. Dollar’s recovery against Euro was less than impressive last week and could have already completed. With an economic calendar that’s jam-packed with important data, any downside surprise could trigger dollar through near near support which in turn trigger further dollar selling. Special focus will be on Wed’s prelim Q4 GDP which is expected to revise downward from 3.5% to 2.5% growth. Thursday’s ISM manufacturing index will also be closely watched for a rebound to above 50 again. Other important economic data include durable goods, consumer confidence, existing and new home sales, Chicago PMI as well as Jan PCE.
Focus in Eurozone will be on Jan M3 and Feb’s flash CPI estimate. Strong, money supply growth is getting increasing concern from ECB. Even though Jan’s growth is expected to moderate slightly from 9.7% yoy growth to 9.5%, it still remain on an uncomfortably high level which should support further rate hike from ECB this year. On the other hand, Eurozone Feb CPI is expected to stay at 1.9%, which is kept within ECB’s target range which could prompt ECB to act slower on further tightening. Both data will be closely watch and market expectation on further ECB monetary policies will shift with surprises in these data. Other data from Eurozone include Germany CPI, Eurozone business climate and manufacturing PMI index.
Other focuses include BoJ minutes (Jan), CPI inflation labor market and private consumption trends, but the yen will still likely remain weak as BoJ has already hiked. Gfk consumer confidence, manufacturing PMI and CBI distribution trade are also scheduled to be released this week Swiss KoF will also be watched.
Suggested Readings:
- http://www.actionforex.com/forex_analysis_and_forecasts/economic_calendar/summary_2%1025_-_3%102_2007022317803/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/dollar_runs_risk_of_big_swings_with_packed_calendar_next_week_2007022317801/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/weekly_focus%3a_usa_-_a_positive_downward_revision_of_growth_2007022317791/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/the_pairs_to_range_trade_this_week_-_gbp%10usd%2c_aud%10usd_and_eur%10cad_2007022317802/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/economic_outlook%3a_germany%2c_slow-fast_2007022317783/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_technical_analysis_reports/is_the_loonie_back_in_control_after_an_18%25_rebound_against_the_usd?_2007022317790/ EUR/USD
After edging higher to 1.3187 initially, EUR/USD turned into sideway consolidation as rise from 1.2939 was limited by 61.8% retracement of 1.3364 to 1.2865 at 1.3173. However, Friday’s rally suggests that such consolidation has already completed at 1.3078. Hence, from a short term angle, initial bias will be on the upside this week. Sustained break of 1.3187 will confirm recent rally has resumed for 1.3296 resistance first.
On the downside, below 1.3106 will indicate EUR/USD is still bounded in sideway consolidation. In such case, another dip to below 1.3078 cannot be ruled out. But still, we’d expect downside to be contained by 1.3034 cluster support (61.8% retracement of 1.2939 to 1.3187 at 1.3034) and bring rally resumption. Sustained break of 1.3034 cluster support is needed to turn short term focus back to the downside to 1.2865 support.
In the bigger picture, corrective fall from 1.3364 should have completed with three waves down to 1.2865. With EUR/USD staying within medium term rising channel (lower channel line at 1.2815 now), medium term up trend from 1.1639 is still in force. Break of 1.3296 resistance will indicate such up trend has likely resumed and EUR/USD should make a new high above 1.3364. However, with bearish divergence condition in weekly MACD and RSI, a medium term top could be around the corner. Upside of this medium term rally could be limited by resistance zone of 1.3668 (04 high) and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. But clear reversal pattern or a break of the lower channel line is needed to indicate a medium term top is formed, otherwise, further rise is still in favor.
In the longer term picture, it’s still early to conclude whether medium term rally from 1.1639 represents resumption of multi-year up trend from 0.8223 or just part of a large scale consolidation that started at 1.3668. But, the three wave corrective nature of the rise from 1.1639 to 1.2978 suggest that this whole rally from 1.1639 will be corrective in nature, thus, favoring the latter case. And therefore, focus will be on reversal signal when EUR/USD enter into 1.3668/3822 resistance zone.
GBP/USD
Cable was basically bounded in tight range most of last week before finally rising strongly on Friday. As the rebound goes, initial bias will remain on the upside this week as long as cable stays above 1.9535 support and further rise cannot be ruled out. However, previous break of rising trend line support (1.8517 to 1.8834, now at 1.9637) indicates the rally from 1.8517 should have already completed at 1.9913. Further correction is still in favor as long as cable stays below 1.9731 resistance. Below 1.9429 will indicate corrective fall from 1.9913 has resumed for 1.9237/61 cluster support (23.6% retracement of 1.7047 to 1.9913 at 1.9237). But, sustained break of 1.9731 will indicate the corrective fall from 1.9913 has already completed and should bring retest of this high.
In the bigger picture, bearish divergence conditions are being displayed in weekly RSI, daily MACD and RSI already, suggesting that the whole up trend from 1.7047 might have completed before reaching mentioned 2.0106 cluster resistance (1992 high, 100% projection of 17047 to 1.9024 from 1.8090 at 2.0067). Focus is still on 1.9237/61 cluster support. Decisive break of 1.9237/61 cluster support will add much weight to the case that whole medium term up trend from 1.7047 has already completed much deeper decline should be seen towards next cluster support at 1.8834 (38.2% retracement of 1.7047 to 1.9913 at 1.8818) first.
Strong rebound from 1.9237/61 cluster support or break of 1.9731 resistance will indicate that the corrective fall from 1.9913 is merely correction to the rise from 1.8517 only and cable could make another high above 1.9913 and attempt to meeting 2.0106 cluster resistance before having a medium term reversal.
In the longer term picture, the break above 1.9554 resistance (04 high) is favoring the case that long term up trend from 1.3680 has resumed after correction from 1.9554 was supported by 55 months EMA. However the structure of the medium term rise from 1.7047 is not clearly supporting this yet. And, we’re still skeptical on it. The structure of the fall after finishing the current up trend from 1.7047 should reveal more information.
USD/CHF
USD/CHF’s fall from 1.2550 was initially contained at 1.2309, inch above 38.2% retracement of 1.1878 to 1.2571 at 1.2306. Subsequent rebound was limited at 1.2436, below mentioned 1.2475 cluster resistance (61.8% retracement of 1.2571 to 1.2309 at 1.2471) as expected. Friday’s sell off indicates that the whole fall from 1.2571 should have resumed. Initial bias will remain on the downside this week and further fall should be seen towards 1.2268 support. Above 1.2409 resistance. is needed to shift short term focus back to the upside.
In the bigger picture, previous break of 1.2374 support should have completed a head and shoulder top formation (with ls: 1.2547, h: 1.2571, rs: 1.2550) and should be an important indication of reversal. Firm break of 1.2268 resistance turned support will confirm that the whole rally from 1.1878 has completed after failing to break through mentioned medium term falling trend line (1.3283 to 1.2760). Also, weekly MACD will still be kept negative with daily MACD staying below signal line. This will favor the case that whole down trend from 1.3283 is still in force. In such case, deeper decline should be seen towards 61.8% retracement of 1.1878 to 1.2571 at 1.2143 and even further to retest 1.1878 low.
On the upside, above 1.2436 will turn focus back to the medium term falling trend line again (now at 1.2495). Sustained break of this medium term falling trend line will indicate that whole medium term down trend from 1.3283 has already completed at 1.1878. Further rally should then be seen towards 1.2768 cluster resistance(61.8% retracement of 1.3283 to 1.1878 at 1.2746) first. Break of 1.2768 cluster resistance will add much weight to the case that whole corrective rise from 1.1288 (04 low) has resumed and further rally should be seen towards 1.3283 (06 high) or above.
USD/JPY
USD/JPY’s rally from 118.96 extended to as high as 121.61 last week but Friday’s retreat suggests that a short term top should be formed there already, with 4 hours MACD dragged below signal line and RSI back from overbought region. Initial bias will be on the downside this week and further correction should be seen towards 4 hours 55 EMA (now at 120.67). However, downside should be contained by 120.32 cluster support (50% retracement of 118.96 to 121.61 at 120.29) and bring rally resumption. Break of 121.61 will indicate rise from 118.96 has resumed for a retest of 122.17 high first. Sustained trading below 120.29/32 cluster support will dampen this view and put 118.96 low back into focus.
In the bigger picture, consolidation from 122.17 should have completed with three waves down to 118.96, after meeting 38.2% retracement of 114.41 to 122.17 at 119.21. Break of 122.17 high will indicate rally from 114.41 and medium term up trend from 108.99 has resumed. At this point, the preferred interpretation of the rise from 108.99 is that the first move has completed at 117.87. Subsequent price actions to 113.95, 119.86 and 114.41 is treated as interim consolidation that’s skewed upward by the rise to 119.86. Rise from 114.41 is treated as resumption of the whole up trend. With this interpretation, next upside target will be 100% projection of 108.99 to 117.87 from 114.41 at 123.29. However, break of 118.96 support will raise some doubt about this interpretation. In such case, a deeper decline should follow to retest medium term rising channel (now at 116.58) first.
In the longer term picture, whether the current medium term rise from 108.99 represents resumption of whole up trend from 101.66 or part of a wide range, long term consolidation pattern that started at 121.38 is still in question. The structure of the rise from 108.99 is not giving much information neither. But still, with this medium term up trend remains in force, and with multi-year falling trend line (147.68, 135.20, 121.38) taken out, the former case is in still in favor. However, break of the medium term rising channel will swing favors back to the latter case and another medium term decline should be seen towards 108.99 low before completing the whole long term consolidation that started at 121.38.