EURUSD â€“ U.S. retail sales were better than expected in January. The rise was attributed to a gain in auto sales and the rising cost of gasoline. Auto sales rose by 0.6% by dollar value. This was the biggest gain since September. Gasoline station sales rose 2.0% in January after remaining unchanged in December. While the gain in auto sales was a surprise, the report seems to indicate a rise in consumer necessities such as gasoline, clothing, and health and personal care items. On the other hand, expensive purchases such as furniture, appliances and electronics fell. One report does not change the recessionary outlook especially if you look at how consumers distributed their spending. The initial report was bearish for the EUR, but the market quickly recovered and settled into a range for the day.
Continue to monitor the markets for any sign of action by the ECB regarding interest rates. Any slowdown in economic growth in the Euro Zone area is expected to fuel the possibility of a rate cut in the short term. The European financial markets have already priced in two cuts after April. Wednesday's inside trading range is a sign that the market is still uncertain as to the short-term direction. Usually these inside days are followed by high volatility days. Watch for expanded range trading on Thursday.
Technical Commentary: The EUR broke early but did no real damage to the downside. The Feb. 7 high at 1.465 is still intact. A trade through this level will only make 1.444 a new main bottom. Active buying at current levels could trigger short covering to 1.469 to complete a 50% retracement of the recent break. Look for sellers to surface at this price. On the downside, a retracement to 1.452 â€“ 1.450 could attract some buying interest.
GBPUSD â€“ In its quarterly inflation report, the Bank of England commented that risks to economic growth remain weighted to the downside. Recent economic releases have indicated a potential surge in inflation. However, the BoE is looking at this as a temporary situation and that growth is likely to ease back down.
The inflation report has confirmed what the UK financial markets have been telling us. Current financial market pricing has been forecasting a continuing ease of interest rates despite the recent inflationary reports.
The short and long term expectations are as follows according to Bank of England Governor Mervyn King, Two key developments shape the latest projections. First tighter credit conditions for households and businesses will bear down on demand both in the United Kingdom and abroad. Second, rising energy, food, and import prices will push up inflation.
Currently, the BoE policy is walking a thin line as they try to stimulate output growth while at the same time remaining focused on curbing demand-caused inflation. In summary, the BoE remains committed to lowering rates but at a slower rate than previously exercised. The pace of future cuts will be dictated by future economic reports especially the housing and credit crises. The market is trading to the upside due to the inflationary reports. Once a report comes out in line with the BoE notion that growth is slowing, expect another break to the downside.
Technical Commentary: The GBP had another strong reaction to the upside despite the release of U.S. Retail Sales, which should have been supportive to the USD. The rally came close to completing a minimum 50% retracement to 1.967. A breakout through this price indicates a trade to the .618 target at 1.974. Short-term support has been established at 1.9525. In the bigger picture, sellers are expected to re-emerge in the 1.967 â€“ 1.974 zone. If the GBP cannot penetrate this zone, then look for the down move to resume with a break to 1.934 likely.
USDJPY â€“ The USDJPY rose after the release of the better-than-expected U.S. retail sales for January. Traders executed carry trades putting their funds in higher yielding currencies. Additional selling pressure in the JPY was caused by a report showing that Japan's GDP growth will slow to 1.74% in the 2008 fiscal year. Most of the news is supportive to the USD at this time. A technical upside breakout, favorable U.S. economic news, a bearish Japanese economic report, and the threat of BOJ invention at 105, are all supportive factors for a rally in the USDJPY.
Technical Commentary: The market finally took out the last main top at 107.88, turning the main trend to up on the daily chart. Expectations are for the rally to continue until it reaches its main objective at 109.80. Support is now at 105.91, 105.71 and 104.96. With the trend up, look for entry prices on pullbacks. The first retracement price is 107.31. Look for strong buying to emerge at this level if given the opportunity. The only disappointment today was the lack of volatility following the 107.88 breakout. Volatility should have expanded given the recent tight trading range.
USDCHF â€“The strong U.S. Retail Sales figure rallied U.S. equities markets and at the same time buoyed the USD against the Swiss. Last week's announcement of higher inflation because of rising energy and food prices caused the Swedish central bank to raise its repo rate by 0.25 percentage points to 4.25%. The central bank is of the view that the economic activities remain good and the labor market strong.
Technical Commentary: The rally finally picked up where it left off last week. The upside momentum returned, putting the USDCHF in a position to rally further and test the last main top at 1.112. A breakout through this level is likely to attract short covering or new buying taking it to the main retracement price at 1.116. On the downside, a failure to hold 1.085 sets up a continuation of the main downtrend and targets 1.072, then 1.05.
USDCAD â€“ This market continued to trade on both sides of parity. The combination of bullish and bearish news has forced the market to range trade over the near term until more solid news stabilizes things. Without an economic catalyst, the USDCAD appears to be content to trade at parity.
Technical Commentary: The USDCAD had an outside range today indicating uncertainty. Parity is a good price to start as far as resistance is concerned although it really should be considered more of a pivot price. Breaking under .9872 is likely to attract strong selling down to .9755 then .9717. A breakout over the last main top at 1.012 is likely to trigger a strong rally especially if it regains the .618 retracement price at 1.019.
AUDUSD â€“ No real fresh news in the AUD drove traders to the sidelines today as traders took profits following the recent run up. The longer-term news is still bullish as the RBA is forecasting an increase in inflation. Wednesday's trade still looks like a technical corrective move.
Technical Commentary: The downside retracement was more than expected, but regaining the short-term Fib price at .8955 indicates that it may be close to over. The market has to begin to build support above this price to setup the next rally. A failure to hold .8955 indicates a test of .8874 is likely. Breaking this price turns the main trend to down, indicating a full retracement to .8806. Look for resistance at .9083 and .9099.
NZDUSD - The NZD followed the tone set in the AUDUSD. Unless the New Zealand central bank softens its comments, expectations are for the bank to refrain from cutting interest rates over the near term.
Technical Commentary: The market needs a breakout through .7966 to reach the next upside target is .8108. On the downside, breaking .7838 is likely to attract selling pressure down to the recent low at .7781. With four tops in this zone, we could be looking at a major top formation with .7674 the minimum downside objective. For this to happen we must begin to see signs of weakness such as lower highs and lower lows.
This week's reports include: Initial Claims (2/14 8:30 EST), Dec Trade Balance (2/14 8:30 EST), Jan export Prices ex-ag (2/15 8:30 EST), Jan Import Prices ex-oil (2/15 8:30 EST), Dec Net Foreign Purchases (2/15 9:00 EST), Jan Industrial Production (2/15 9:15 EST), Jan Capacity Utilization (2/15 9:15 EST), and Feb Michigan Sentiment prelim. (2/1510:00 EST).
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