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Daily Forex Technical Report

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Weekly Review and Outlook − An Important Week Ahead with ECB and Non−Farm Payroll

Sat, Jun 28 2008, 15:19 GMT
by ActionForex.com Team

ActionForex.com

Action Insight Weekly Review and Outlook

An Important Week Ahead with ECB and Non-Farm Payroll

A couple of dollar negative theme was seen dominated the forex markets last week which resulted in the greenback being sharply lower across the board. Firstly, the highly anticipated FOMC statement showed lack of urgency in a rate hike from Fed. Markets pared bets on near term hikes with odds of an Aug, as implied by interest rate futures, down from 40% to 25%. Odds of an Sept hike was also down to just slightly above 50% and the case looks shaky if upcoming economic data doesn't show sign of stabilization in the economy. Secondly, oil price surged to another record high close to $143 a barrel. The surge in oil price then triggered sharp sell off in the equity markets.

Technically speaking, last week's development aligned outlook of major pairs back to dollar bearish, at least in near term and further weakness should be seen in the greenback. Meanwhile, even though the Japanese yen did close lower against Euro and made a record low of 169.46 on Thursday, Friday's reversal is treated as a warning that more strength in the Japanese could be seen due to risk aversion.

Looking ahead, a couple of important events will are scheduled this week, including the highly anticipated ECB rate decision and NFP, ISMs from US. Much volatility is expected.

FOMC left federal funds rates unchanged at 2.00% as widely expected, ending the most aggressive policy easing cycle since 1980s. The decision was done by a 9-1 vote with Dallas Fed Fisher voting for a hike. In the accompanying statement, Fed highlighted "uncertainty about the inflation outlook remains high" due to continued increase in energy and commodity prices. Regarding downside risks to growth, the committee judges that it has "diminished somewhat while "upside risks to inflation and inflation expectations have increased". Dollar spikes higher after release as the statement looks a bit hawkish, but quickly reversed as it's adding little to what the markets already know. More importantly, the statement showed a lack of urgency for rate hike and traders immediately pared bets on a rate hike from Fed in Q3.

Regarding the housing markets, the S&P Case-Shiller home price continued to deteriorate in April with the 20-city composite index posted a record annual decline of 15.3%. New home sales dropped slightly by -2.5% to 512k annualized rate, a touch above consensus of 511k. Existing home sales unexpectedly rose 2.0% to 3.99 annualized rate.

Consumer confidence remains fragile. Conference Board Consumer Confidence dropped sharply to a 16 year low of 50.4 in Jun, versus consensus of 56.3. University of Michigan consumer sentiment was revised further lower to 56.4 in Jun.

Regarding inflation, May Headline PCE rose 0.4% mom, 3.1% yoy, lower than expectation of 3.2% yoy. Core PCE was unchanged at 2.1% yoy. Though, personal income growth surged sharply to 1.9%, strongest since Sep 05, while spending growth also climbed strongly to 0.8%, boosted by tax rebates.

Durable goods orders climbed a mere 0.03% on the month of May, with ex-transport orders falling -0.9%. The report gives little evidence that manufacturing is improving in Q2. Q1 GDP was revised high from 0.9% 1.0%. Jobless claims climbed higher and remains above 380k at 384k.

Economic data from Eurozone were not encouraging neither. Germany Ifo Business Climate index tumbled sharply from 103.5 to to 101.3 in Jun, missing expectation of 102.3 and was the lowest reading since Jan 06. Looking into the details, trade and industry component was hit hard and fell sharply from 6.2 to 1.7. Weakness was seen broadly including in the current situation and business expectations components. Germany Gfk consumer confidence dropped sharply to 3.9 in Jul versus expectation of 4.6. Eurozone June flash PMI manufacturing and service were also worrying, as both dipped into contraction region below 50 at 49.1 and 49.5 respectively. The data argued that strength in the Euro, skyrocketing oil prices and a six-year high interest rate of 4% for the past 12 months was starting to be felt as burdens to the Eurozone economy.

Also released, Germany import prices growth accelerated to 2.4% mom in May, an 18 years high, yoy rate also accelerated sharply to 7.9% versus expectation of 6.9%. Eurozone M3 money supply growth came in at 10.5% yoy, with 3 months averages at 10.4%. Current account deficit was at -0.3B in Apr. Industrial orders rose 2.5% mom, 11.7% yoy in Apr.

Sterling was boosted by BoE comments on inflation. BoE Governor Mervyn King testified together with policy makers John Give, Timothy Besley, Paul Tucker and Kate Barker. All of them said they had considered a hike this month even though in the end the decision to keep rates unchanged at 5.00% was done by a 8-1 vote with Blanchflower voted for a cut. Also, all of them are clearly concerned with rising inflation risk and expectations and headline CPI in UK may exceed 4% later this year. Though, King still emphasized that BoE should not 'overreact" to surge in energy prices and won't risk bringing the economy into deep recession by raising interest rates easily.

UK Rightmove house price report showed the average asking price for a home dropped -1.2% mom in May. CBI distribution trade climbed from -14 to -9 in May. Current account deficit was narrowed than expected at -8.4B in Q1 . Q1 GDP growth was revised lower to 0.3% qoq, 2.3% yoy.

Swiss KOF leading indicator dropped further to 1.01 in June.

A number of economic data were released from Japan last week. National CPI surged from 0.8% to 1.3% yoy in May but was slightly below expectation of 1.4%. Trade surplus shrank less than expected to 365.6b in May, with export climbing 3.7% yoy, imports up 4.4% yoy. CSPI rose 0.6% in May. Unemployment rate was unchanged at 5.0% in May. Housing spending dropped more than expected by -3.2% yoy. Industrial production dropped to 1.2% yoy while retail sales fell by -2.1% yoy.

Nevertheless, Swissy and yen were boosted by risk aversion.

New Zealand current account deficit narrowed less than expected to -2.16b in Q1. New Zealand GDP showed contraction in first quarter by -0.3% qoq, dragging yoy rate down from 3.7% to 1.9%. Trade deficit narrowed to -196M in May.

Canadian PPI accelerated to 2.4% yoy in May. Canadian was once sharply higher against dollar as oil made another record high above $142 a barrel.

The Week Ahead

The US markets will be shortened by national holiday on Friday but the coming week is jam packed with highly important events that could shake the markets. Firstly the markets would likely be building up for a rate hike from ECB on Thursday, in particular in Jun Flash CPI estimate in Eurozone does accelerate to 3.9% yoy as expected. Markets are expecting a 25bps rate hike from ECB based on recent hawkish comments from Trichet and other officials. Even though recent growth and sentiments indicator showed that economy in the Eurozone is slowing quicker than expected, skyrocketing oil and food prices and induced inflation will likely be used as the main bullet for ECB to raise rate. However, note that firstly, Trichet may signal in the post meeting conference that the hike is a one-off event and that may trigger some profit taking in Euro long positions. Secondly, should ECB keep rates on hold, the common currency will be punished hard. So after all, there are some downside risks in the Euro this week, in particular, if the possibility of reversal in EUR/JPY crosses on risk aversion is taking into considerations. Other important data from Eurozone include PMIs, unemployment and retail sales.

From US, main focus will be on Thursday's Non-Farm Payroll report (a day earlier than usual since Friday's a US market holiday) which is expected to show consecutive sixth months of contraction in the job market in Jun. Unemployment rate is expected to ease back from 5.5% to 5.4%. Other important economic data from US include ISM manufacturing and manufacturing indices. Note that the case for a Sep hike is marginal. In other words, the bias of greenback could flip flop again as the expectation is changed up every piece of upcoming tier one economic data.

Sterling enjoyed a strong rebound against dollar last week but will face the test of manufacturing and services PMI in this week.

From Japan, main focus will be on the quarterly tankan survey, which is expected to show sharp deterioration in manufacturers' sentiment. The tankan usually has close correlation to GDP growth in Japan and will be a leading indicator of nearly flat growth in Q2.

Swiss CPI is expected to accelerate to above 3% to 3.1% yoy in Jun.

From Canada, main focus is on Apr GDP which is expected to rebound by growing 0.3% mom.

RBA is widely expected to be on hold at 7.25% this week. May retail sales will be watched.

More Technical Analysis Reports Here

EUR/USD Weekly Outlook

EUR/USD's rise from 1.5302 continued last week and extended further to as high as 1.5791 to close the week strongly. From a short term angle, initial bias remains on the upside this week as long as 1.5695 minor support holds. Further rise is expected to test 1.5843 resistance. Note that at this moment, it's uncertain what form of pattern will the consolidation from 1.6019 eventually develop into. 1.5843 remains a key near term focus. Break of this resistance will add favor to the case that consolidation has already completed and will bring stronger rise to retest 1.6019 record high first. On the downside, below 1.5695 minor support will indicate that an intraday top is in place and EUR/USD could has started the final leg of triangle to complete the consolidation from 1.6019.

In the bigger picture, a medium term top is in place at 1.6019 after meeting 1.6 psychological resistance. Subsequent sideway consolidation should be close to completion, it not finished already. As mentioned above, above 1.5843 will indicate that such consolidation has completed. Further decisive break of 1.6019 will confirm this case and bring rise to 61.8% projection of 1.4309 to 1.6019 from 1.5284 at 1.6341 first. On the downside, while another setback could still be seen before completing the consolidation, downside should be contained above 1.5302 support. Break of this support level is needed to switch to the case that price actions from 1.6019 are developing into deep correction to test 1.4966 cluster support.

In the longer term picture, there are various interpretations of the medium term up trend from 1.1639 but none of them is really convincing yet. Rather than focusing on the structure, we'd like to emphasize the pattern of a series of higher highs and higher lower since 1.1639 and as long as this pattern remains, the up trend from 1.1639 is more likely in progress than not. In other words, with 1.4309 medium term support still holds, rise from 1.1639 is still in progress. Such rally is treated as resumption of long term up trend from 0.8223 (00 low) to 1.3668 (04 high) and could still extend to 100% projection of 0.8223 to 1.3668 from 1.1639 at 1.7084, even prolonged medium term consolidation will take place before resumption. However, sustained break of this 1.4309 cluster support, which will also have 55 weeks EMA (now at 1.4783) taken out too, will argue that the whole up trend from 1.1639 has already completed and have medium term outlook turned bearish.

Published on  Sat, Jun 28 2008, 15:21 GMT