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At 8:30:00 AM US Jan Import Prices (exp 0.5%, prev -0.9%) US Jobless Claims (exp 370k, prev 376k) US Dec Business Inventories (exp -0.5%, prev -1.0%) US Jan Exports Prices (exp 0.2%, prev -0.4%)
The dollar held firm against its European counterparts after rising nearly one percent on Wednesday from multi-week lows. The euro and sterling each clung to support at 87-cents and $1.4270 without so much as an attempt higher and then succumbed to renewed selling pressure. Stronger than expected core retail sales data lent support to the dollar as it highlighted that US consumers are not afraid to spend, even in a recession. Today's data is also expected to show a further fall in US jobless claims, signaling that the worst may be over. A more complete inventory picture for December will also be released today and that is expected to show a further 0.5% fall after sharp drops the previous two months. US recovery optimists point to the low level of inventories as a harbinger of future demand growth. However, today's data should have little discernable impact as markets will be more interested in tomorrow's industrial production and consumer confidence data which are expected to show a decline and could limit the dollar's rise.
EUR/USD fell below key 87.00/10 support to a day's low of 86.84 in afternoon European trade after a mostly lackluster day of range trading. The break lower counters any hope for the recent rally after offers at 88.00/10 kept a cap on EUR/USD gains after Monday's wave of stop-loss buying failed to develop into more sustainable demand for the euro. With support at 87.30/40 now turned into resistance, a failed recovery to above the 87.05/86.95 support would be the next bearish implication for the euro. A move below this level would target 86.52, the 61.8% retracement of the 85.63 to 88.03 move, on its way to February's 6-month low of 85.63.
Weighing on the euro was a surprise drop in German retail sales which fell far below consensus estimates of a 1.4% rise in December. Sales plunged 3.5% after a large rise in November, which produced a 4.1% year on year decline in retail sales. Given the troubles facing Germany and their recent battle with the European Commission over spending during this downturn, the European Central Bank's monthly bulletin looked all the more austere. The central bank shed little new light on the bank's inflation or growth outlook and said that interest rates are considered to be appropriate to bring inflation safely below 2% in 2002.
EUR/USD weakness spilled over onto the pound and Swiss franc which each were holding near support levels at $1.4270 and 1.7050 francs before succumbing to further selling pressure. GBP/USD support is now seen at the previous resistance levels of 1.4235 and 1.4180. Resistance is seen at 1.4270 and 1.4300.
USD/CHF also jumped higher, past 1.7055 resistance which marks the 61.8% retracement of the 1.7229-1.6770 move. The break higher is bullish and the pair could now target 1.7229 on its way to 1.7248 resistance, which marks the 61.8 retracement of the 1.8226-1.5665 move. Support is seen at 1.6820 followed by 1.6685, which marks the 61.8% retracement of the 1.6350-1.7229 rally. EUR/CHF also held near earlier 5-week highs despite broad euro weakness.
The Swiss franc continued to ease against the euro and dollar because the market sees the government wanting a weaker franc vis a vis the euro. However, some traders are becoming skeptical if the SNB will actually lower rates again from their target range of 1.25 to 2.25. With cuts already in the pipeline and signs that the economy could pick up again in the second half of the year, any additional rate cuts in the coming months would take three to six months to work through into the real economy. Therefore, a shift in sentiment to no more rate cuts could remove the weakening bias.
Meanwhile, the yen continued to hold strong as repatriation concerns stemming from Friday's US Treasury coupon payment where some Japanese could opt to cash it in for yen. But 5 consecutive gains in the Nikkei also highlighted the fact that foreign investors have likely stopped selling Japanese assets. This week's stabilization in the Nikkei and 10-year government bonds will likely support the yen inasmuch as Japanese repatriation of overseas assets outweighs foreigners selling of Japanese assets. The main factors pointing to a stronger yen in the near term: (1) Weak yen rhetoric abating. (2) Talk of injecting money into the financial system to support prices has worked, for now. (3) Nikkei stabilizing, halting foreign selling of Japanese assets, and turning net repatriation in Japanese favor (4) Yet the current Nikkei levels still imply losses on balance sheets at the end of the year, thus making the case for Japanese repatriation of foreign assets to continue. This will put upward pressure on JPY in the near term.
USD/JPY trading near day lows of 132.30 while EUR/JPY slipped below 115 for the first time in 2 weeks. Support is seen at 131.90 followed by key support at 131.45. Resistance seen at 133.37 day high and 133.70.