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The dollar staged a comeback on Tuesday, breaking key resistance levels against the euro and sterling, while climbing to a day's high of 128.95 yen in London trade. The stabilization against the yen makes calling the short-term direction difficult ahead of FY-end in March, but most dealers point out that current levels mark good entry points to go long USD/JPY over the medium term. Meanwhile, today's gains against the European majors put their recent rallies in question.
Data from the Eurozone today contrasted with last week's upbeat figures from the US. Euro area 2001 Q4 GDP showed an expected contraction of 0.2%, putting it up a mere 0.6% from a year earlier. The data had little impact on EUR/USD but did highlight the growth divergence after the surprising revision in US Q4 GDP from 0.2% to 1.4%. EUR/USD broke below key support at 87.35, which marks the 50% retracement of the move from 86.29 to 88.39, and fell to a 1-week low of 87.20. More importantly, the pair now lies below 87.30, which is the trendline support of the bull move from 86.29. A break of 87.20 would call upon support at 87.10/00, and a break of that key support would damage the bullish sentiment and force many dealers to call 88.39 the high and look for possible new lows below 86.29. Resistance seen at 87.60, which marks the 61.8% retracement of the move from 86.29 to 88.39.
The larger than expected decline in UK industrial production data also helped the dollar gain ground today against the pound. Data from the UK was expected to show industrial production rose slightly in January by 0.1% after falling 10 of the previous 12 months. Instead, production contracted by 0.5% m/m to bring the annual rate down to -5.2% from -4.6%. Manufacturing data also contracted 0.4% m/m and 6.1% y/y in January. Today's data contrasts with the sharp break back above the key 50 level in the US ISM survey on manufacturing which gave dollar bulls a reason to sell GBP/USD.
GBP/USD broke below key support at 1.4180/85 and quickly fell to a new day's low of 1.4117 as it tripped stop loss orders along the way to a 1.5-week low before recovering to around 1.4150. Cable breached 1.4135 which marks trendline support from the 1.4043 low of this year. Support is seen at 1.4140 followed by 1.4110. Resistance at 1.4220, 1.4250, 1.4300 and the 200-day moving average of 1.4333.
USD/CHF bounced off support at 1.6780 which is the 50% retracement of the rise from the year's low of 1.6356 to the year's high of 1.7222. However, it could not regain its 200-day moving average of 1.6840 after it slipped below this level last week. Next support seen at 1.67, backed by 1.6680--the 61.8% retracement of the aforementioned move. Upside faces initial pressure at 1.6840 followed by 1.6885-the 38% retracement of the move. Next target seen at 1.6935-40. Against the yen, the dollar climbed back from an overnight low of 127.75 to a session high of 128.95, but offers from Japanese exporters and speculators capped gains and held the pair below Monday's high of 129.15. USD/JPY rose to a day's high as profit-taking in the Nikkei's four-day rally of 5% last week pushed shares back 2% on Tuesday. There still remains doubt as to whether the Nikkei can maintain its recent gains after the March 31 fiscal year end and whether the spectacular rise in yen on speculative trading will come undone over the next few weeks. BoJ Governor Hayami alluded to this on Friday when he said he expected the market to be stable through the end of March, but did not say what could happen afterwards.
USD/JPY was also supported by further indications from Japanese officials that the yen's sharp rise last week was problematic for the Ministry of Finance which prefers a stable currency. Economics Minister Takenaka reiterated today that the yen's recent rise was too rapid and his comments were expected to keep speculators at bay. This followed Zembei Mizoguchi, head of the finance ministry's international bureau, who warned on Monday the authorities were prepared to take intervene in the markets if necessary.
This morning's announcement by the Japanese Government Pension Investment Fund had little effect on the yen despite it showing the fund would shift its weighting to 8% foreign bonds from 6% and reduce its holding of domestic stocks and bonds in response. Dealers say the 9 trillion yen in new money will likely be put in foreign assets too. USD/JPY is now supported at 127.75, which marks the 38.2% retracement of the 115.75-135.15 move. On Monday, it provided a solid base for a corrective rally in the pair to a high of 129.15. However, speculators who had been on the sidelines have poured in to go long the yen. Therefore, USD/JPY could still target 125.28, the 50% retracement of the same move. More importantly, the yen is approaching its 200-day moving average of 125 for the first time since November. Resistance is seen at Monday's high of 129.15 followed by 129.65, 130.65 and 131.65 which mark the 38.25, 50%, and 61.8% retracements