The U.S. dollar pares its gains after a brief recovery on a combination of retreating oil prices, dovish comments from the Bank of Japan (BoJ) and the Bank of England’s (BoE) decision to leave rates unchanged. The yen dropped for the second-straight day after BoJ policy board member Hidehiko Haru said there is no rush to raise interest rates, rejecting criticism from European officials that rates were too low and exasperating carry trades. The comments follow Wednesday’s remarks from Japan’s Finance Minister Koji Omi, who said the yen would not be a topic of discussion at the G-7 meeting, starting this Friday in Essen, Germany. Omi’s remarks helped the yen peak at 119.94 against the dollar, 155.24 against the euro, and 235.33 against sterling.
Light sweet crude for March delivery drops by more than $1.00 to $57.67 a barrel, helping the dollar regain stability. The weekly chart below shows oil’s 18% recovery of the past three weeks to have amassed a bullish divergence in the moving average convergence divergence indicator (MACD), suggesting further upside in the medium term targeting 62.30-62.50 territory, which is the 38% retracement of the major decline from the all-time high recorded in July, to the 18-month lows reached last month. Major resistance remains at the seven-month trendline of 64.70. Prolonged cold weather, persistent war of words between the United States and Iran and the kidnappings of oil workers in Nigeria have helped support energy prices across the board. With the weather authorities continuing to forecast sub-normal temperatures across the Northeast of the United States until at least February 19, the uptrend is expected to remain intact.
Aside from further dissecting the impact of the upcoming G-7 meeting, markets next week will gear up to a busy schedule of indicators and events. Wednesday and Thursday will include Federal Reserve Chairman Ben S. Bernanke’s testimony to Congress as well as the Fed’s semi annual report on monetary policy. On the data side, markets await reports on U.S. trade, retail sales, TICS, industrial production, Philly Fed and housing market index.
Trichet’s “strong vigilance” supports euro
ECB President J.C. Trichet offers brief support to the euro after describing the bank’s policy approach as “strong vigilance,” implying further rate hikes to come. Trichet upgraded the bank’s assessment, saying growth outlook to be broadly balanced in the shorter term, compared to being on the “downside” in the last press conference. With German trade unions demanding the usual 65% wage increase, it is expected that the ECB will have to normalize rates further, to as high as 4.00% later in the year, especially if oil prices breach above the $60 level and Euro zone CPI rebounds past the 2.0% figure. But it’s worth mentioning that the ECB is conscious of the risks of renewed euro upside, especially as the currency approaches the 157 yen level and renewed oil price increases risk triggering further dollar declines.
EUR/USD seeks to retest Wednesday’s 1.3025 high, which was the four-and-a-half-week trendline resistance. Interim resistance stands at 1.3050, followed by key barrier at 1.3080—50% retracement of the 1.3289-1.2863 high. Support stands at 1.2990, backed by 1.2960.
USD/JPY shows bearish
After gaining in the last two days, USD/JPY is now displaying bearish formation on the four-hour candle chart, with the hammer candle suggesting a reversal could be underway towards the 120.80, followed by 120.50. The weekly chart also suggests further downside with the lower shadows suggesting lack of conviction in the current rally. Despite the recent remarks from Japanese officials, catalysts for further yen gains are apt to emerge from stepped up pressure from Europe and China on the interest rate front. Upside capped at 121.70.
Cable damaged by Bank of England’s
Cable drops by more than a full cent to 1.9565 after the doves prevailed at the Bank of England’s decision to keep rates unchanged at 5.25%. Interim target stands at 1.9530, followed by 1.95. Markets now wait for the BoE’s inflation report due this month, for a longer-term view on price pressures. The fact there were as many as four dissenters in last month’s rate hike, despite inflation surpassing the BoE's 2.0% target by a full 1% point, suggests that rates may have peaked. Upside capped at 1.9620, followed by 1.9645-50.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220
(212) 644-4222a.laidi@cmcmarkets.com
