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USD Rallies, Awaits ECB & BoE

Wed, Aug 6 2008, 22:26 GMT
by Korman Tam

Forexnews.com

8/6/2008 3:00 PM: EUR/$..1.5415 $/JPY..109.54 GBP/$..1.9473 $/CHF..1.0599 AUD/$..0.9100 $/CAD..1.0474

USD Rallies, Awaits ECB & BoE

The dollar rallied sharply across the board on Wednesday, breaking another technical resistance level – past the 108.60-handle versus the yen to reach a new 7-month high to 109.62. Crude oil slumped to a fresh 3-month low at $117.29 per barrel while gold fell to a near 2-month low at $872.35. The shift in market sentiment to focus on deteriorating growth prospects has rewarded the greenback amid burgeoning recessionary fears in the UK and Japan.

The FOMC’s aggressive policy easing from September 2007, which sharply reduced the Fed Funds rate from 5.25% to 2.0% -- its lowest level since November 2004, will continue to trickle through and stabilize the US economy. Moreover, the results from yesterday’s FOMC policy meeting revealed only one dissenter, Dallas Fed President Fisher, which suggests the Fed will likely delay in shifting toward a tightening bias and leave interest rates unchanged for the remainder of the year.

In contrast, fundamentals in Japan have further deteriorated with the Cabinet Office saying, “There is a high possibility the economy has entered a recession”. With interest rates at 0.50%, the Bank of Japan is limited in its options to prop the struggling economy. The reports released overnight from Japan saw the coincident indicator reverse and post a 1.6 decline for June versus a 1.3-reading in the previous month, while the leading indicator worsened to -1.7 from -0.2 in May.

The key technical levels breached by the greenback against the major currencies in recent sessions bode well for its near-term corrective tone. The next major resistance areas the dollar will encounter will emerge around the range of 1.5280-1.5340 against the euro – which marks the neckline support for a triple top formation on the daily chart and 1.9334 versus the sterling, the pair’s low for the year. Meanwhile, the break above the 108.60-handle in the dollar/yen pair suggests the pair will encounter some selling pressure near the 110-region, which marks the 50% Fibonacci retracement of the decline from 124.12, on June 22, 2007 to 95.73-low on Mar 21, 2008.

 
Markets await Central Bank Decisions

The string of soft data from the Eurozone have revealed that it has not been resilient to tightening credit conditions and the global economic downturn, tempering prospects for additional policy tightening from the ECB. In particular, the reports from Germany have deteriorated rapidly, with the latest industrial orders data plunging unexpectedly by 2.9% in June compared with expectations for a 0.5% increase. In the session ahead, traders will also digest the impact of the euro’s strength on Germany’s trade balance figures. Consensus estimates are calling for an increase in the June trade surplus to 15.0 billion euros, up from 14.6 billion euros a month earlier.

The ECB is largely expected to leave interest rates unchanged at 4.25%. Recall at the previous meeting, Bank President Trichet stressed that the ECB currently has a neutral bias and offered little hint of whether additional policy tightening can be expected. Given the deterioration in economic fundamentals and the recent price retreat in oil, we look for ECB to leave interest rates unchanged for the remainder of the year.
Meanwhile, the Bank of England is also not expected to change policy, holding rates steady at 5.0%. As customary when the BoE remains unchanged, there will be no policy statement.

Published on  Wed, Aug 6 2008, 22:29 GMT