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Daily Forex Technical Report

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Forex Weekly Review and Outlook − Dollar to Draw Further Strength from US Data and FOMC Statement

Sat, Jan 27 2007, 09:11 GMT
by ActionForex.com Team

ActionForex.com

Forex Weekly Review and Outlook

Dollar to Draw Further Strength from US Data and FOMC Statement

Dollar staged a broad based rebound last week after solid data as well as weakness in other majors. The greenback will look forward to a busy economic schedule that feature a series of important US economic data including GDP, ISM and NFP as well as FOMC meeting to draw further strength to extend the rebound that started early this year. On the other hand, Sterling tumbled across the board last week after a much less hawkish than expected MPC meeting minutes and vote outcome. Yen was volatility on G7 rumors. Australian dollar fell sharply after disappointing Q4 inflation data that dimmed hope for a Feb hike.

The US economic calendar was light last week but nevertheless, dollar was supported by solid durable goods orders report and housing data. Dec headline durable goods orders were up 3.1% on a year-to-year basis, much better than consensus expectations of 2.5% growth, and far outpaced Nov’s upwardly revised 2.2% gain. Ex-transport orders were also up 2.3% beating expectation of 0.5%. New home sales rebounded further in Dec by 4.8% to 1.12m annualized rate, above expectation of 1.05M. Existing homes sales, despite being a touch below expectation and recorded 6.22M, is still staying above Sep's low of 6.21M.

Euro failed to extend it's rebound but instead reversed to end the week lower against dollar despite some solid data that continues to strengthen the case of a Mar hike from ECB. German Ifo business climate, despite giving up modest ground in Jan and fell to 107.9 from a 16 year high of 108.7, retained a firm overall tone and suggest that condition remains healthy for German investors in spite of the VAT hike. In addition, Dec eurozone M3 figures point to continued expansion in the money supply, accelerated to 9.7 yoy growth from 9.3% in prior month, further bolstering the view that the ECB will retain its tightening bias and deliver another hike in Mar.

The yen saw much volatility last week. Yen was boosted initially by carry trade liquidation, in particular against Australian dollar after a worse than expected Australian CPI. Rumors of yen's weakness being a topic of discussion at the upcoming G7 meeting has triggered further carry trade liquidation that pushed the yen higher. However, market sentiments quickly reversed again after European and Japanese officials denied such rumor. Yen was pushed lower further after a weak inflation report which with Dec headline CPI being flat and core CPI growth rising a mere 0.1%.

Sterling carried on its strength initially last week and rose to fresh 30-months high against Euro and a 14 year high against dollar. However, sentiments reversed after MPC minutes which revealed that the surprise rate hike in Jan was done by a much tighter than expected vote of 5-4, instead of market expectation of 7-2. BoE Chief Economist Charles Bean, BoE Deputy Governor Rachel Lomax, Paul Tucker and David Blanchflower dissented in favor of no change. The overall debate centers around whether preemption is better than waiting for additional evidence. Jan's move should have basically eliminated another hike again in first quarter and markets are quickly scaling back the bets on it. Opinions on whether there will be another hike in second quarter is divided and focus will be back on fundamental data including earnings growth and inflationary expectations. Sterling fell sharply across the board since then. Not even the better than expected UK GDP report which showed GDP GDP growth accelerated to 0.8% qoq and 3.0% yoy was enough to reverse its fortune.

Canadian dollar remains pressured and weakened against dollar last week after disappointing inflation report. In particular, core CPI dropped 0.2% mom in Dec, dragging the yoy growth back to 2.0%. BoC will clearly keep rates on hold for the next few months and the Loonie will likely remains weak.

Aussie tumbled sharply after downside surprise in Q4 CPI that actually dropped 0.1% qoq, dragging yoy increase to 3.3%. This has disappointed the Aussie bulls who expect another hike from RBA in Feb and looked for a 0.2% qoq, 3.6% yoy increase in consumer inflation. Meanwhile, RBA's own measure of underlying inflation, weighted mean and trimmed mean both rose 0.5% qoq, taking yoy grow to 3% and 2.9% respectively. Opinion is divided on whether RBA will hike in Feb. Based on the current inflation outlook, even if RBA does hike in Feb, this would likely be the last one in the current cycle.

RBNZ kept rate unchanged at 7.25% as widely expected. Governor Bollard remained hawkish as he said that "in the absence of clear indications of a moderation in housing and domestic demand, it is likely that further policy tightening will be required." However, inflation is expected to "decrease considerably" this year as energy prices fall even though is will accelerate again in 2008 and be in the upper end of his target range of 1-3%. So, it's still a close call on whether RBNZ will raise rates again in first quarter and that will very much depends on the upcoming housing and domestic growth data. Nevertheless, kiwi was boosted mildly after the announcement.

The Week Ahead

A heavy US economic calendar with be featured that will dominate the focus this week and likely trigger a lot of volatility in the markets. FOMC meeting will be one of the major focus of the week. Fed is widely expected to keep rates unchanged at 5.25%. Since the last meeting in Dec, there has been a serious of rather upbeat data. Hence, the focus of attention will be any positive change in growth outlook in the accompanying statement. Though Fed will still likely keeps rate unchanged at least throughout first half, the evolution of Fed's voting member's view on growth and inflation will continue to shift expectation on policy directions in the second half of the year.

Right before FOMC announcement on Wed, Q4 GDP data will be released. Expectation for this piece of data is high after a stronger of stronger than expected key data was released recently, in particular retails sales and trade balance. Economists expect growth to accelerate to 2.9%. Meanwhile, core PCE is expected to stay at 2.2%.

ISM manufacturing index and employment report will also be closely watched. ISM manufacturing index is expected to rebound further to 52.0 in Jan. Meanwhile, NFP report is expected to show 149k job growths in Jan, with unemployment rate staying at 4.5% and average hourly earnings growth to slow slightly from 0.5% to 0.3%. Other important economic indicators include Conference Board Consumer Confidence, Chicago PMI, Construction Spending, Dec PCE and Factory orders.

From Eurozone, German and Eurozone inflation data will be featured together with Manufacturing PMI. The UK calendar includes house price data, manufacturing PMI as well as Gfk consumer confidence. Swiss KOF leading indicator will also be closely watched. Japanese data will center around consumer spending, retail sales, in the earlier part of this week together with employment report, industrial production as well as housing data.

Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY) here.

EUR/USD

Despite initial rebound, EUR/USD's upside was limited at 1.3042, below 1.3052 cluster resistance (38.2% retracement of 1.3364 to 1.2867 at 1.3057) as expected and EUR/USD weakened to as low as 1.2876 since then. From a short term point of view, initial bias for this week remains on the downside as long as EUR/USD stays below 1.2935 minor resistance. Further decline is expected to follow to retest 1.2865 low and trend line support at 1.2851. Break will confirm whole fall from 1.3364 has resumed for next downside target of 1.2760 support.

Above 1.2935 will turn intraday outlook consolidative but upside should be limited below 1.3000 resistance and bring decline resumption. It will take a break above 1.3000 to indciate that consolidation from 1.2865 low is still in progress and in such case, put focus back to 1.3052 resistance.

In the bigger picture, the whole medium term rise from 1.1639 has lost momentum as bearish divergence condition is being displayed in weekly MACD and RSI. An important medium term top could be in place at 1.3364 already, after meeting 61.8% projection of 1.1639 to 1.2978 from 1.2483 at 1.3311. Sustained break of 1.2760 will have medium term rising channel line (now at 1.2747) taken out too. This will add much weight to the case that whole medium term up trend from 1.1639 has completed. Focus will then be on 1.2483 cluster support (50% retracement of 1.1639 to 1.3364 at 1.2502). Decisive break of 1.2483 cluster support will confirm this case and have medium term outlook turned bearish.

On the upside, a break of 1.3052 cluster resistance will indicate the fall from 1.3364 has possibly completed after drawing support from resistance line (1.2978 to 1.2937, now at 1.2851). This will also save the case that medium term up trend from 1.1639 is still in progress with EUR/USD kept inside the rising channel. Break of 1.3296 resistance will suggest the rise from 1.2483 has possibly resumed and EUR/USD could make a new high above 1.3364 before finally making a top on above mentioned bearish divergence condition in weekly chart.

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. Decisive break of 1.2483 cluster support will also confirm this and bring much further weakness towards 1.1639 low.

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Published on  Sat, Jan 27 2007, 09:10 GMT