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At 11:00:00 AM US Jan K.C. Fed mfg survey (exp n/f, prev 21)
The dollar added to last week's losses against the European majors but held firm against the yen in London trade on Monday. Dollar losses were seen as mostly technical after a break of key resistance at $1.4180 in GBP/USD triggered stop loss orders to a day's high of 1.4235. That in turn triggered a rise in EUR/USD above key resistance at 87.50 onto a 2-week high of 87.80. However, the gains in sterling and the euro against the dollar are still regarded as an upward correction.
Heavy buying of sterling by European banks drove GBP/USD through an earlier high of 1.4176 rising to key resistance at 1.4235. The reaction high of 1.4247 now needs to be broken in order to wage a move on key resistance at 1.4340, which marks the 61.8% retracement of the 1.4525-1.4038 move. Without a break of that level, the pair remains heavy, dealers say.
Today's producer price data showed a small 0.1% increase in output prices and a 0.6% fall in input prices in January, as expected. But the market will be more interested in tomorrow's RPIX inflation data and Wednesday's Bank of England inflation forecast which should provide clues on interest rate hikes later this year. Stronger than expected inflation would lead to further expectations for the UK to be the first major country to raise interest rates this year as the BoE tries to stem debt fueled consumer spending.
EUR/USD shot to a two-week high of 87.80 on a wave of stop-loss buying after breaking 87.50 with the help of GBP/USD buying. However, the euro still needs to clear 88 cents followed by key resistance at 88.75/80 to remove its bearish outlook. That level marks the 61.8% retracement of this year's high to low of 90.63 to 85.63.
This should prove difficult ahead of tomorrow's meeting of European Union finance ministers in Brussels where Germany is facing censure for allowing its deficit to come close to the 3% of GDP limit. An official warning would not only be embarrassing for Germany but could also highlight the difficulty facing the Eurozone's largest economy caught between the European Central Bank not lowering interest rates and Germany's own brain child the Growth and Stability Pact.
Therefore, if Wall Street finds its footing today and markets then turn their attention to the growth inhibitive structure of the Euro area, the single currency could come under renewed selling pressure.
The Swiss franc rose in tandem with the euro and sterling against the dollar. USD/CHF fell to a day's low of 1.6820, just pips above Friday's low. With support at 1.6875/80 taken out, the dollar needs to maintain above 1.6820 to avoid further fall to the 1.6685 area. This level marks the 61.8% retracement of the 1.6350-1.7229 rally, which should hold dealers say. Economic data today showed the Swiss January jobless rate rose to 2.6% from 2.4% in December, as expected.
USD/JPY maintained above 134.00 support but is likely to come under renewed pressure if option barriers rumored to exist around 135 to 136 prove to difficult to overcome. Repatriation concerns are another reason traders should remain weary to short the yen as Japanese corporations bring home overseas assets ahead of the fiscal year end in March. Support is seen at 134.10 and key support at 133.40.
Japanese officials are also likely to try and reign in the yen to a range between 130-135 over the short term as the cost of the weak yen policy has been detrimental to asset prices as it undermines confidence in the ability to hold value. Given the weakened state of Japanese financial institutions amid falling stock prices, the Japanese are now more likely to shun yen weakness in order to restore confidence in the market.
The dollar will likely continue to follow Wall Street with dealers weary of further losses ahead. Last week's dollar weakness reflected 5 consecutive days of decline before Friday's rally. Stocks suffered from the debacle with Enron that had stoked pessimism throughout US markets, leading investors to overlook strong US economic data, such as better-than-expected productivity figures. Therefore, the recent fall in US equities is likely to be contained and the greenback could regain its strength as further signs of a US economic recovery emerge. But if the US has another disappointing day on Wall Street today, the dollar could suffer further setbacks on the basis of flows to the US market slowing due to investor concerns.
There is little in the way of economic data this week until Wednesday. Today's only release is the KC Fed manufacturing survey. in view of the positive the recent upturn in other national manufacturing indicators, the market expects to see similar improvements in the KC area.