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Dollar rode on intensified credit concern in the Eurozone and optimistic tone of FOMC statement to extend recent rebound broadly. Technically, EUR/USD dropped further away from the 55 days EMA which is inline with the view of medium term reversal. AUD/USD also completed a head and shoulder top last week as a the dovish RBA statement suggested that the rate hike cycle is paused. Dollar index rose to as high as 78.14 and was accompanied by gold's fall to close at 1113.6.

Euro was under pressure last week first on news that Austria is forced to nationalize nationalize Hypo bank, that ran into trouble on hidden losses in Eastern Europe. Then, S&P downgraded Greece's government debt rating from A- to BBB+, reflecting their opinion that the measures are lead to a sustainable reduction in the public debt burden. S&P also cut long term credit ratings fro Greek banks EFG Eurobank Ergasias and Alpha Bank AE by one level to BBB, and put those ratings on creditwatch negative. The worry on Eurozone's banks drove funds to dollar and Swissy with EUR/CHF broke through 1.5 handle for the first time since March and closed at 1.4946.

Fed keep the policy rate at 0-0.25% and pledged 'exceptionally low levels of the federal funds rate' will be maintained 'for an extended period'. Nevertheless, Fed acknowledged recent positive developments in the job market and financial market and said that 'the deterioration in the labor market is abating' while 'the housing sector has shown some signs of improvement over recent months'. Moreover, 'financial market conditions have become more supportive of economic growth'. Also, the statement said that businesses remained 'reluctant to add to payrolls', rather than continued 'cutting back on fixed investment and staffing'.

The Japanese yen got little support in a risk averse environment on concern that BoJ will be expanding its quantitative easing program. There are talks that the yen is back to be the favored funding currency for carry trades. BoJ left rates unchanged at 0.1% as widely expected. Also BoJ reviewed its midterm price stability target and said that it will not tolerate CPI at zero or below as it sees CPI growth of around 1% as its understanding of price stability. The statement triggered speculations that BoJ is still on the road to further quantitative easing and will keep rates low for a prolonged period of time.

Sterling was relatively resilient last week as supported by solid employment data which showed unexpected drop in claimant counts in November by -6.3k even though unemployment rate did rose to 7.9% in October. Nevertheless, retail sales was a disappointment which dropped -0.3% mom in November. Weakness in EUR/GBP will likely provide some additional support to the pound in near term.

Aussie was under much pressure last week as dropped as much as -2.48% against dollar. RBA minutes said that the three interest rate hikes since October is now giving it greater flexibility at future policy meetings and imply the possibly of slowing the pace. RBA emphasized that the rate adjustment would not be intended to slow demand compared with the current forecast path, but aimed simply at keeping the stance of policy appropriate for improving economic conditions. Traders are concerned that RBA would pause the tightening cycle in Q1.

Looking at the charts, dollar index rose further away from 55 days EMA, which further confirm that it has bottomed out in medium term at 74.19 after being supported by 74.31 key support level. As noted before, the least bullish scenario is that rise from 74.19 is a correction to the five wave decline from 89.62 and will target 38.2% retracement of 89.62 to 74.19 at 80.08. The most bullish scenario is that three wave consolidation pattern from 88.46 has completed and up trend from 70.70 is resuming for another high above 89.62. It's still early to conclude which scenario is more likely. Focus will be on whether rise from 74.19 will develop into an impulsive five wave rally eventually. In any case, we'll stay bullish on the dollar index as long as 75.58 resistance turned support holds.


The Week Ahead

Market activities will decrease as Christmas holiday approaches but volatility could increase due to thinner market conditions. Also, there are a few focus to note. Firstly, it will be interested to see whether SNB will continue to tolerate EUR/CHF to stay below 1.5 level. Secondly, BoE minutes will be watched on the committee's view on possibility of further quantitative easing. Thirdly, as BoJ is well alerted on risk of deflation, CPI data from Japan will probably trigger some volatility in the Yen too. Fourthly, US data including housing, personal income and spending and durables will be watched on whether they could extend dollar's recent rise.

  • Monday: Japan trade balance; SNB quarterly bulletin; Canada retail sales
  • Tuesday: German Gfk consumer sentiment; UK final GDP; US Existing home sales
  • Wednesday: New Zealand GDP; BoE minutes; Canada GDP; US personal income and spending, new home sales
  • Thursday: BoJ minutes; US durable goods orders
  • Friday: Japan CPI, unemployment rates

EUR/USD Weekly Outlook

EUR/USD's fall from 1.5143 extended further to as low as 1.4261 last week and the development is inline with the view that is has topped out in medium term already. Initial bias remains on the downside this week and further decline should be seen towards 38.2% retracement of 1.2329 to 1.5143 at 1.4068 next. On the upside, above 1.4424 minor resistance will turn intraday bias neutral and bring consolidations. But upside should be limited by 1.4589 resistance and bring fall resumption.

In the bigger picture, medium term rise from 1.2456 has completed at 1.5143 on bearish divergence conditions in daily MACD. Focus now turns to 1.3737 cluster support (50% retracement of 1.2329 to 1.5143 at 1.3736). Decisive break there will also confirm the case that three wave consolidation from 1.2329 has finished at 1.5134 too. In other words, whole medium term term fall fro 1.6039 should be resuming for a new low below 1.2329. On the upside, above 1.5143 is needed to invalidate this view. Otherwise, outlook will now remain bearish.

In the long term picture, the lack of impulsive structure of the rise from 1.2329 argues that it's the second wave of the wide range correction that started from 1.6039. Another medium term decline could still be seen to 1.2329 and below. Break of 1.1639 support is possible based on 100% projection of 1.6039 to 1.2329 from 1.5143. But downside will likely be contained by 61.8% retracement of 0.8223 to 1.6039). After all, the long term up trend from 0.8223 is set to resume after completing the three wave medium term correction from 1.6039.





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