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Daily Forex Technical Report

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Mid−Day Forex Technical Report − Dollar Still Firm after BoE Hike, ECB's "Vigilance" & Weak Trade Data

Thu, May 10 2007, 13:42 GMT
by ActionForex.com Team

ActionForex.com

Forex Mid-Day Technical Report

Dollar Still Firm after BoE Hike, ECB's "Vigilance" & Weak Trade Data

Dollar managed to head higher in early US session despite ECB's signal for a June hike, BoE's rate hike as well as worse than expected trade deficit in Mar. Trade deficit widened more than expected by 10.4% in Mar, caused by increased energy prices and reaches $-63.9b despite revision of Fed's deficit from $-58.4b to $-57.8b. Both exports and imports increased, while imports increased more than exports. Though, the goods deficit with China, however, narrowed 6.4% to $17.2 billion. Import Price Index increased 1.3% in Apr., led by a 6.5% increase in petroleum prices. Export prices rose 0.3%. Jobless claims unexpectedly fell to 297k, much below expectation of 315k

ECB left rates unchanged at 3.75% today and Trichet said in the following press conference that "strong vigilance is of the essence to ensure that risks to price stability in the medium term do not materialize," as there are clear upside risks to price stability. The word "vigilance is taken as a signal that ECB will raise rates again by 25bps in Jun to 4.00%. However, this provided little support to the Euro. In addition, in responding to a question over EUR/USD's recent strength, Trichet seemed talking down the Euro by twice referring to US Treasury Paulson's comments that a strong dollar is in US interest. This put additional pressure to the common currency.

BoE raised benchmark rates by 25bps to 5.50% as widely expected. After last month's surprisingly high CPI of 3.1%, BoE still expects that "CPI inflation is likely to fall back to around the 2% target in the course of this year". However, BoE notes that with narrowing capacity constraints and enhanced producer pricing power, risk is 'tilted' to the upside. After all, the tone of the accompanying statement was non-committal, and focus will turn to May 16's Inflation Report for the latest inflation and output projections for hints on the how much more is needed from BoE to realistically bring inflation down to it's 2% target. Meeting minutes on May 23 will also be closely watched on the split of votes and views of the MPC members.

Sterling has been under pressure pre BoE announcement after weaker than expected data. Trade deficit widened to -7.05B while industrial production rose 0.3% mom, and dropped -0.2% yoy, below expectation of 0.4% mom rise and 0.0% yoy. BoE's non-committal statement and UK Prime Minister Tony Blair 's much-anticipated announcement that he will step down on Jun 27 offered little help to the pound.

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

EUR/USD

Daily Pivots: (S1) 1.3508; (P) 1.3537; (R1) 1.3555; More

EUR/USD's fall from 1.3681 resumes again in early US session by breaking below 1.3514 support. At this point, intraday bias will remain on the downside as long as EUR/USD stays below 1.3566 resistance and further decline is expected to follow. As discussed before, previous break of the short term rising channel warns that the whole rally from 1.2865 has already completed at 1.3681 on bearish divergence condition in 4 hours MACD and RSI. Hence, the current decline is expected to extend further towards 1.3406/10 support. However, a strong rebound to above 1.3566 resistance will suggest that the current fall has possibly completed and will put focus back to 1.3627 resistance.

In the bigger picture, with 1.3668 target met, risk of medium term reversal is also increasing. As discussed before, medium term up trend from 1.1639 is interpreted as having first move completed with three waves up to 1.2978, subsequent sideway consolidation completed at 1.2483. Rise from 1.2483 is treated as resumption of the whole up trend from 1.1639. With such interpretation we'd expect risk of medium term reversal to increase significantly as EUR/USD enter into resistance zone between 1.3668 and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. Hence, focus is now on reversal signals.

On the downside, break of the short term rising channel support is already a warning that the rise from 1.2865 has likely completed. Decisive break of 1.3406/10 support, with 55 days EMA (now at 1.3410) taken out too, will confirm such case. More importantly, with bearish divergence condition in daily MACD and RSI, this will be the first warning that the rise rally from 1.2483 has also completed, and thus, so is the whole up trend from 1.1639. Focus will then be back to medium term rising channel support (now at 1.3010).

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Published on  Thu, May 10 2007, 13:45 GMT