Dollar strength ensues on the back of negative reports overseas; with the surprise resignation of Italy’s Prime Minister Romano Prodi weighing on the euro, lower inflation projections in the United Kingdom prolonging sterling weakness and dovish pronouncements from the Bank of Japan (BoJ) more than offsetting this week’s rate hike. But the U.S. currency continues to struggle at two-month lows against the Canadian dollar on a combination of oil prices breaking above $60 and Canadian retail sales surprising on the upside. Yesterday’s higher than expected 0.3% reading in U.S. core consumer price index (CPI) was partially the result of volatile items that are unlikely to take hold. These dollar gains, however, may be curtailed sharply next week in the event that the market-influencing reports of new home sales, existing home sales, fourth quarter gross domestic product (GDP) revision and manufacturing ISM (Institute for Supply Management) point to renewed slowdown.
There was no significant market affect from the release of the Jan. 30-31 Federal Open Market Committee (FOMC) minutes, as these echoed Federal Reserve Chairman Ben. S. Bernanke’s testimony last week, which downgraded the risks of both inflation and falling growth. Despite the fact that the minutes were explicit in maintaining the Fed’s tightening bias, we reiterate that the central bank’s hawkish stance is mainly rhetorical rather than operational.
The 8:30 am EST release of weekly jobless claims is expected to show a retreat to 325,000 from the prior week’s jump to 357,000. The Labor Department said that as much as 25% of that increase was a result of snowstorms. We expect a firming in the dollar in the case of a reading of less than 310,000 to 315,000, while a figure of more than 325,000 to 330,000 will likely slow the currency’s positive momentum.
Friday’s German IFO survey (4:00 am EST) and United Kingdom’s fourth quarter GDP (4:30 am) will be the main market movers for the day. More detail below.
EUR/USD eyes further losses at 1.3060
EUR/USD drops below 1.31 to 1.3090, inline with our projected target yesterday. The resignation of PM Prodi raises doubts about Italy’s fiscal affairs and the nation’s overall political stability despite chances pf Prodi’s return to form a new government. Unless there is an upside surprise in the U.S. jobless, such as above 325,000 to 330,000, selling momentum is seen extending towards the key 1.3067 support—50% retracement of the 1.2943-1.3192 rise and the trendline support since Feb 12. Considering the euro’s lackluster momentum, a figure of less than 107 and 112 in tomorrow’s IFO climate survey and current assessment could accelerate losses towards the 1.30 figure. Upside seen capped at yesterday’s resistance of 1.3140, as seen in the chart below.
USD/JPY eyes 121.50, capped at 121.85
After yesterday’s rate hike, Bank of Japan Governor Toshihiko Fukui’s remarks, which indicated that inflation could drop to 0%, add to the dovish message to the markets. The potential for a low reading in U.S. jobless claims may amplify the strengthening momentum in the pair past the 121.40 retracement resistance, followed by 121.50. Increased momentum is seen capped at the 121.85 trendline resistance, which stands as a barrier for the week. But traders will be cautious from next week’s market-influencing data: new home sales, existing home sales, fourth quarter GDP revision, ISM and core PCE. Support starts at 120.80.
Sterling capped at 1.9540s, eyes 1.9460
Bank of England’s MPC member Richard Beane hit sterling with a double punch, saying the consumer price index (CPI) is likely to drop back sharply this year well below the 2% target, while the strong pound will complicate matters for exporters. One week after the Bank of England indicated inflation will meet its target with no more than one rate hike, markets have aggressively curtailed chances of future tightening to only one rate hike. The key question now is whether these slowing inflation expectations will be accompanied by signs of weaker growth, which would be a punishing prospect for cable and especially bullish for EUR/GBP. Any downward revision in Friday’s release of U.K. fourth quarter GDP from the initial 0.8% q/q should trigger fresh selling towards 1.9430s.
Cable’s resistance stands at 1.9530, followed by 1.9540, followed by 1.9560, at which point renewed selling pressure is likely to dampen gains back towards the 1.95 figure. Weak U.S. jobless claims should further weigh on the pair, calling up 1.949, followed by 19460.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222
a.laidi@cmcmarkets.com
