The U.S. dollar moderates its declines against most foreign currency, expect the yen, which is losing across the board on a temporary surge of risk appetite, reflected in performing world bourses. Germany’s IFO business survey exceeded expectations in each of its three component indices in March, nearing the 16-year highs reached in December and proving that domestic demand has overwhelmed any impact from this year’s VAT tax hike to 19% from 16%.
U.S. data will start with more on housing at 9 am EST with the S&P/Case Shiller monthly Home Price Indices. The Composite 10 index fell 0.2% in September, 0.2% in October, 0.4% in November and 0.8% in December, reaching 222 in December from 225.1 in September. The Composite 20 index also fell in each of the last four months, reaching 203.1 in December.
The day’s flagship indicator shall be the 10 am key release on U.S. consumer confidence from the conference board, which could very well add to the ensuing bearishness in the U.S. dollar and equities via a worse-than-expected headline number. Consensus forecasts are already expecting a drop to 108.5 in March from 112.5 in February due to rising gasoline prices, falling home prices and persistent uncertainty from the sub-prime fallout on general stock indices. A private index on Investor Optimism by UBS fell 12 points to 78 in March, reaching its worst level in six months due to expectations of falling stock prices and rising gasoline prices. 72% of investors said they believe the national real estate market is getting worse (up from 63% in February), with only 21% believing it is getting better (down from 30%).
Revisiting the dollar’s head-and-shoulder formation
You do not have to be an expert on technical analysis to know that a price chart showing the shape of a head-and-shoulder formation (H&S) is a classic bearish pattern. You may recall that last Wednesday, the morning of the FOMC meeting, we alerted readers that the U.S. dollar index daily chart ending on Tuesday evening showed an H&S pattern, which predicted a dollar drop by end of FOMC Wednesday. Indeed, the dollar index tumbled that day from 83.2 to 82.7 because of the dollar’s tumble to two-year lows against the euro at 1.3410 and USD/JPY to 117.20.
Today, the head and shoulder formation is back in play, sending a more resounding signal after the repetitive failure to break above the neckline resistance.
EUR/USD eyes 1.34, spurred by both sides of the coin
EUR/USD is boosted by favorable fundamentals from both the Euro zone and the United States , with the former justifying further rate hikes and the latter further opening doors for a H1 rate cut. Germany’s IFO business climate rose to 107.7 in March from 107.0 in February, overshooting expectations of a decline to 106.5, and nearing December's record high of 108.7. The situation index rose to 112.4 from 111.6, while the expectations index rose to 103.2 from 102.6. The upbeat survey shored up expectations that the European Central Bank (ECB) could increase rates to 4.0% by June from the current 3.75% currently, to hold down inflation. The German business climate had slightly deteriorated at the start of the year on the back of the rise in German value-added tax to 19% from 16%. The inflation justification for further rate hikes was signaled by ECB council member Liebscher who said inflation clouds were developing on the horizon as well as second-round inflation effects.
Keeping in line with the aforementioned head and shoulder formation in the U.S. dollar index, we expect EUR/USD to break past the 1.3365 resistance and onto the 1.34 figure. Support stands at 1.3320, backed by 1.33 and 1.327.
U.S. data seen capping USD/JPY The dollar’s modest rebound is once gain stretching at its fullest against the lower yielding Japanese currency, testing yesterday’s 118.40s at which point we expect traders to pause before the release of the important U.S. consumer confidence figures. Traders must also keep an eye on U.S. equity futures ahead of the opening bell as a gauge of sentiment. Expect resistance to act at 118.44—the 50% retracement of the 121.69-115.18 decline. In the event of an upside surprise in U.S. consumer confidence, USD/JPY may extend gains towards the 118.70s on sharp reduction in risk appetite.
But traders must also watch the 9 am EST release of the Home Price Indices measured by S&P/Case Shiller monthly index, whose deterioration will not go unnoticed in the current sub-prime uncertainty. U.S. data disappointment is seen dragging USDJPY towards 117.80 and 117.50. Key support stands at 117.20—the 38% retracement of the 115.22—118.4 move.
Sterling drops on dovish MPC Sterling drops across the board after five members of the Bank of England’s (BoE) Monetary Policy Committee sounded off a mostly comfortable tone on inflation during a testimony to the treasury committee of Parliament. BoE governor King said inflation expectations movements are small and High Street price growth is acquiesced despite a recent pickup in market expectations. His take on wage growth was similarly unhinged. Fellow MPC members Gieve, Sentence and Lomax were similarly comfortable with medium term inflation pressures.
Despite the rise in EUR/USD, GBP/USD drops to 1.9630s from overnight highs of 1.9700s, lifting EUR/GBP to 68 from 67.60. We expect cable to extend its retreat towards the 1.9620s until the release of U.S. data, which we deem to be the catalyst for stability at the 1.96 figure. It would take a clearly bearish U.S. data for cable to regain the 1.9670s. Key resistance stands at 1.97.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
140 Broadway, 30th Floor
New York, NY 10005
(212) 644-4220
(212) 644-4222 fax
a.laidi@cmcmarkets.com
