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Daily Forex Technical Report − Euro Strengthens Against Dollar & Yen, ECB to Remain Hawkish

Thu, Apr 12 2007, 07:42 GMT
by ActionForex.com Team

ActionForex.com

Forex Daily Technical Report

Euro Strengthens Against Dollar & Yen, ECB to Remain Hawkish

Euro strengthens further against dollar and yen ahead of ECB rate decision today. ECB is widely expected to be on hold today. Markets are currently expecting another hike in June and hence, there shouldn't be any surprise from the ECB press conference after the rate announcement. Trichet will likely continue to say that they'll monitor the development very closely, rather than using the magical "vigilance" to signal a May hike. Meanwhile, Trichet will likely continue to say that rates are "moderate" and "on accommodative side", as he has already changed the wordings from "low" and "accommodative" in last press conference. Regarding inflation, Trichet will likely continue to emphasize that risk is still on the upside in medium term. After all, we don't expect any thing new in the press conference that would alter the hawkish stance and the expectation of a June hike.

Elsewhere, dollar remains bounded in tight range against other majors. Regarding inflation, the minutes said that "the prevailing level of inflation remained uncomfortably high, and the latest information cast some doubt on whether core inflation was on the expected downward path," and "upside risks to inflation appeared to have increased slightly in recent months." All members agreed that Fed's "predominant policy concern remains the risk that inflation will fail to moderate as expected". Also, further policy firming might "prove necessary" to foster lower inflation.

Regarding growth, the members noted that "additional evidence of sluggish business investment and recent developments in the subprime mortgage market suggested that the downside risks relative to the expectation of moderate growth had increased in the weeks since the January FOMC meeting." Also, they agreed that the "possibility of persistently sluggish investment spending was an important downside risk to the outlook for economic growth."

With "increased uncertainty about the outlook for both growth and inflation", the FOMC also agreed that the statement should no longer cite "only the possibility of further firming. And that provided the answer to the the change of language in the last statement from "additional firming" to "future policy adjustments".

After all, we believe the minutes is neither hawkish, nor dovish. It's not even neutral in a sense that the members are not comfortably certain that inflation and growth will play out as they expect with the current policy stance. The members are actually rather "uncertain" about which direction the next change will be and are alerted that incoming data could significantly change the stance.

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

EUR/JPY

Daily Pivots: (S1) 159.81; (P) 160.11; (R1) 160.64; More

EUR/JPY strengthens further to as high as 160.86 today, meeting mentioned upside target of 100% projection of 150.75 to 155.72 from 152.64 at 160.68 and 100% projection of 152.64 to 158.801 from 155.34 at 160.71. At this point, further rally is still in favor as long as EUR/JPY stays above 159.58 support. Next upside target will be upper boundary of medium term rising channel (now at 161.48). However, risk of a short term reversal increases as EUR/JPY approaches this resistance, which will coincide with short term rising channel resistance (now at 161.32) too. Break of 159.58 will indicate a short term top is possibly formed and bring pullback towards lower end of the short term channel (now at 157.81).

In the bigger picture, we're treating the whole year long rise from 130.60 as resumption of the long term up trend with first wave ended at 143.60, subsequent correction ended at 137.167. The third wave up could have ended at 159.63 with a diagonal triangle already. Fall from 159.63 should represent the fourth wave correction and has already met it's target of 38.2% retracement of 137.16 to 159.63 at 151.05) and lower channel line (143.60 to 159.63, 137.16). The current rise from 150.75 should represent the final rally in the whole move targeting upper boundary of the medium term channel (now at 161.48). Attention will be paid to reversal signal as EUR/JPY approaches this resistance.

On the downside, break of the short term rising channel indicate that the rise from 150.75 low has completed and more importantly, will be the first warning that the medium term could be formed. In any case, deeper decline should be seen towards 155.34 support first in such case.

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Published on  Thu, Apr 12 2007, 07:41 GMT

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