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At 8:30:00 AM US Dec Personal Consumption (exp -0.1%, prev -0.7%) US Dec Personal Income (exp 0.2%, prev -0.1%) US Jobless Claims (exp 375k, prev 376k) At 10:00:00 AM US Dec Help Wanted Index (exp n/f, prev 45) US Jan Chicago PMI (exp 48.5, prev 41.4)
The yen fell in European trade after ratings agency Standard and Poor warned about the state of the Japanese economy and raised the prospect of another sovereign downgrade. But the decline was short-lived after USD/JPY spiked to a day's high of 133.22 and then fell back to key support around 132.65 afterwards. EUR/USD also rose to a high of 114.88, but today's comments from S&P were not enough to stem more corrective buying in JPY.
S&P's announcement was the major news in today's European session, but had little effect on the yen. Recently, an S&P official described Japan's banking system as technically insolvent and the market now recognizes that Japan will have to do something about its problem loan situation. The S&P also said that Japan's economic stagnation has turned into a worrisome deflationary recession with no sign of upturn. And, further delay in structural reform or economic recovery will increase possibility of sovereign downgrade.
USD/JPY fell after it failed for a second time in two days to break resistance at 133.20. This follows Monday's failed attempt at 135.00 and the dollar is now looking to test trendline support from the November low of 119.70 which currently lies around 132.55. The pair must maintain above this level to avoid further corrective losses in USD/JPY. But this is unlikely if the pair moves sideways and a break of 132.50 would see a further move to 132.00 followed by 131.00. Key support stands at 129.10, which marks the 38.2% retracement of the 119.70 to 134.95 move. Meanwhile, the upside is capped at 133.20 and 133.60.
JPY has benefited recently from a letup by Japanese officials chiming in unison about yen weakness. Another point of contention this week will be whether the G7 meeting in Toronto and the World Economic Forum in New York become a sounding board for big global interests to bash the recent resurgence in the dollar against the yen. Manufacturers, like GM on Wednesday, are likely to complain that the state of the economy is now about at the same level just prior to the September 11 attacks, but the USD/JPY is trading near 40-month highs. Meanwhile, the dollar was steady against European majors and recouped some of yesterday's losses against the pound after the US Federal Reserve kept its key interest rate unchanged at 1.75% and maintained its easing bias. The positive response by Wall Street was supportive of the dollar, especially given the recent Enron ripple effects felt on Tuesday's sell off of US equities. The dollar also rebounded sharply after US Q4 GDP rose 0.2% q/q, beating estimates of a second consecutive negative quarter. This showed the US has avoided a technical recession and the Fed's supportive remarks were bullish for the dollar. EUR/USD held to a tight range of 86.00-86.40. The pair fell back to support at 86 cents after failing to hold onto gains above 86.30 overnight. But the single currency will need to regain the 86.80/90 mark to really improve its outlook. If not, it still looks vulnerable to fall back below 86.00 on its way to this week's 6-month low of 85.72. A break below this would then target 85.55, the 71.8% Fibonacci retracement of the move from 82.25 to 95.95. Resistance is viewed at 86.80, and the key 87.40/50 level which marks the 61.8% Fibonacci retracement of the same move. Today's much anticipated German states' inflation came above expectations and is likely to prevent the European Central Bank from cutting interest rates soon, thereby weighing on the euro. German inflation surged upwards in January, but mainly because of tax increases and higher food prices rather than the impact of the euro changeover, according to preliminary data from the individual states. Other data from the euro area was Italy's ISAE revision of 2002 GDP down to 1.5%. Meanwhile, the French jobless rate was steady at 9.0% in December compared with the previous month. Although the consensus was for a rise to 9.1%, the figure suggests that the euro area's second largest economy is stabilizing after a sharp economic downturn. USD/CHF again tested resistance at 1.7140, which marks the ascending trendline resistance. Swissy fell back to a low of 1.7060 but remains well supported above 1.6945, the 50% retracement of the 1.8220 to 1.5770 move. Also keeping pressure on the france was the Swiss KoF indicator which fell to -1.37 in December from -1.28, marking a worsening of conditions, not a turnaround as many had hoped. Therefore, given the recent bullish data and positive outlook by the Fed, USD/CHF should remain well supported. GBP/USD moves were dictated by the rise and fall in EUR/GBP today from a low of 60.84 to a high of 61.24, or a 0.7% swing in European trade. The rise in EUR/GBP put sterling under pressure to a day's low of $1.4090, but the subsequent reversal in EUR/GBP allowed cable to rise to a day's high of 1.4158. However, resistance at 1.4183, which marks the 38.2% Fibonacci retracement of the 1.4418-1.4038 move, has held so far. Barring a break of this resistance, renewed weakness could prevail. Support is seen at 1.4120 and 1.4080. The sharp moves in sterling reflect a recently released poll from investment bank Credit Suisse First Boston which shows only a very small majority of Britons opposes joining Europe's single currency in the next two to three years. In contrast to a 70% opposition last year, the poll now showed 42% of those asked would support euro entry within the next two to three years while 46% were opposed. The other data from the UK today showed a sharp rise in British consumer confidence in January to +6 from -1. This reflected yesterday's data showing net consumer credit rose more than expected in December to 2.166 billion pounds compared with a rise of 1.5 billion pounds in November. Despite recent data and reports on the UK economy which have highlighted disparities between manufacturing and consumption, the increase in consumer credit was seen as adding to consumption which has kept the economy afloat with robust growth. But they also reinforce the perception that the Bank of England will be reluctant to cut interest rates again any time soon. Today's data from the US includes the release of Chicago PMI, which is forecasted to rise to 45.5 in January from the previous 41.4, mirroring the improvement seen in the ISM (formerly NAPM) survey. The pickup in the manufacturing sector is attributable to increased spending on durables and other goods, and therefore, US Personal consumption is expected to rise to 0.1% in December from the previous 0.7%. Personal income is also assumed to post a gain of 0.3% in December from the previous 0.1%, even though the Employment cost index is projected to hold steady at 1.0% in Q4. Markets will again focus on Wall Street for direction and today's earnings announcements include AFLAC, Alcatel, Alliance Capital Management, Barnes & Noble.com, Delta Air Lines, Dole Food, Dow Chemical, KPMG Consulting and Walt Disney.