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Weekly Review and Outlook − EUR/USD Pullback on Trichet, Fedspeaks ahead

Sat, Jul 5 2008, 15:35 GMT
by ActionForex.com Team

ActionForex.com

Action Insight Weekly Review and Outlook

EUR/USD Pullback on Trichet, Fedspeaks ahead

Dollar staged a strong rebound last week, helped by ECB Trichet downplaying the chance of another rate hike from ECB after raising rates by 25bps to 4.25% on Thursday. But the biggest winner was indeed the Aussie which with respective crosses topping the top movers chart even though RBA was on hold and sounded slightly dovish. Also, the rebound in dollar is viewed as a profit taking correction ahead of a long weekend only. With data showing little evidence of a turnaround in the economy and with persistent strength in oil prices that made another record high above $145 a barrel, there is no change in the dollar bearish outlook yet. Looking a head, a number of Fed officials are scheduled to speak this week and should catch much attention from the markets. Other important events include BoE meeting, Canadian job report as well as Australian job report.

The labor market in US showed little sign of improvement. The highly anticipated Non-farm payroll report in Jun was close to consensus. Job markets continued to contract for the sixth consecutive months and gave up -62k jobs in Jun, close to expectation of -60k. Unemployment rate was unchanged at 5.5%. Jobless claims rose again to 404k. Employment component in ISM manufacturing index dropped sharply to 43.7. Employment component in ISM Services index dropped sharply to 43.8 in Jun. Both were deep in contraction region.

ISM manufacturing index finally recovered back to above 50 at 50.2 in Jun, signaling mild expansion and that the downturn in the economy is, at least, not worsening further. Price paid component surged to 91.5, confirming the underlying upstream inflationary pressure. However, ISM services missed expectation and dropped back into contraction reading of 48.2. Prices paid surged sharply from 77.0 to 84.5. US Chicago PMI climbed mildly to 49.6 in Jun, above consensus of a fall to 48.4 but remains below 50. Factory orders rose 0.6% in May, above expectation of 0.5%.

Euro was boosted early last week by stronger than expected inflation data but was sold off after ECB meeting. Jun CPI estimate saw consumer inflation surged to 4% yoy, doubling ECB's target of 2%. PPI report showed producer inflation accelerated sharply from revised 6.2% to 7.1% in May, beating expectation of 6.7%.

ECB raised rate by 25bps to 4.25% as widely expected. However, Trichet said in the post meeting conference that the current monetary stance after last week's rate hike is enough to achieve ECB's objective of price stability and he has no bias now. The markets took that as a signal that today's 25bps hike to 4.25%, was really a one off event and Euro was sold off on profit taking after rumor became news.

Data from Eurozone saw unemployment rate unchanged at 7.2% in May. PMI manufacturing was revised slightly up to 49.2. Services PMI in Eurozone dipped to contraction region of 49.1 too. Retail sales, though, unexpectedly rebound from at 1.2% mom, with yoy rate back to positive at 0.2%.Data from Germany were solid, with retail sales climbing 1.3% mom, 0.7% yoy, unemployment rate dropped slightly further to 7.85%, with -38k drop in unemployment count. German PMI manufacturing was also revised up to 52.6 in Jun.

Japanese Q2 Tankan survey showed confidence among businesses dropped to the lowest in almost five years. Big manufacturer confidence tumbled sharply from 11 to 5 in Q2 but was above consensus of 3. Non-Manufacturing confidence dropped from 12 to 10, also above consensus of 8. Q2 capex rose more than expected by 2.4%. Manufacturing PMI dropped from 47.7 to 46.5 in Jun. Housing starts dropped -6.5% yoy in May to 1.07M. Construction orders fell -25.2% in May. Leading indicators dropped -0.2% in May.

UK Gfk consumer confidence tumbled further from -29 to -34 in Jun, hitting the lowest level since 1990. Nationwide house price dropped by -0.8% mom, dragging yoy rate down to -6.3% yoy in Jun. UK PMI manufacturing index dived to 45.8 in Jun, hitting the lowest reading since Dec 2001. UK Services PMI hit lowest level in seven year at 47.1 in Jun. Construction PMI dropped to an 11 year low of 38.3 in Jun.

Swiss CPI was unchanged at 2.9% yoy in Jun. SVME PMI dropped to 54.9 in Jun

Canadian GDP beat expectation by rebounding 0.4% mom in Apr. Ivey PMI beat expectation by rising to 69.6 in Jun.

It was a volatile week for the Aussie but after all, it was the best overall performer. Aussie extends the pull back from new 25 year high made after RBA left rates unchanged at 7.25% as widely expected. More importantly, the accompanying statement sounded confident that "demand growth will be moderate this year," balancing the "concerning" inflation outlook. While inflation is likely to remain "relatively high" in short term on rises in global oil prices, it's believed to decline over time. The statement suggests that interest rates will remain at a 12 year high of 7.25% for considerable period of time. Aussie was later boosted by stronger than expected retail sales report. sales jumped 0.7% mom in May, rebounding from prior -0.2% fall and beat expectation of 0.1%. The strength in consumer spending argues that prior tightening may not be enough to really slow demand and inflation. Trade balance turned deficit at -956M in May.

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The Week Ahead

The economic calendar of US is rather light this week. Nevertheless, markets will be busy listening to speeches from a number of Fed officials including Yellen on Monday and Thursday, Bernanke and Lacker on Tuesday. Bernanke and Treasury Paulson will also testify on markets before House Committee on Thursday. Other data from US include pending home sales, wholesale inventories, trade balance, import prices and U of Michigan consumer sentiments. Also, markets will look into Thursday's jobless claim report to see if it will stay above 400k level.

Focus in the Eurozone will be on Germany industrial production, trade balances and Q1 GDP final. Trichet will speak on Wednesday and Thursday.

BoE is scheduled to meet this week and is widely expected to leave rates unchanged at 5.00%, will likely be a non-event. Economic data include industrial production on Monday, Nationwide consumer confidence on Tuesday and the May trade balance on Wednesday.

The bigger market mover could indeed be the job report from Australian and Canada this week.

EUR/USD Weekly Outlook

EUR/USD's rise from 1.5302 extended further to as high as 1.5908 last week but reversed sharply on profit taking since then. The break of 1.5843 resistance suggested that consolidation from 1.6019 has already completed at 1.5302 and rise from there represents resumption of the medium term up trend. Hence, the retreat from 1.5908, though steep, is still viewed as correction to rise from 1.5302 only and is expected to be contained by 1.5651 resistance turned support and bring another rally. Above 1.5776 will flip intraday bias back to the upside for 1.5908 first. Break will bring retest of 1.6019 record high. However, break of 1.5651 will dampen this view and turn outlook mixed.

In the bigger picture, a medium term top is in place at 1.6019 after meeting 1.6 psychological resistance. As mentioned before, break of 1.5843 indicates that such consolidation has likely completed at 1.5302 already. 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, however, below 1.5468 support will mix up the picture by firstly suggesting that rise from 1.5302 has completed. Secondly, it will revive the case that consolidation from 1.6019 is still in progress. Retest of 1.5302 support could be seen in such case.

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 1.4816) taken out too, will argue that the whole up trend from 1.1639 has already completed and have medium term outlook turned bearish.

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Published on  Sat, Jul 5 2008, 15:45 GMT

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