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At 4:30:00 AM UK March RPI-Y m/m (exp 0.3%, prev 0.2%) UK March RPI-Y y/y (exp 2.4%, prev 2.7%) UK March RPI m/m (exp 0.4%, prev 0.3%) UK March RPI X m/m (exp 0.4%, prev 0.2%) UK March RPI -X y/y (exp 2.3%, prev 2.2%) UK March HICP y/y (exp 1.5%, prev 1.5%) UK March RPI y/y (exp 1.3%, prev 1%) At 10:00 AM Germany April ZEW survey (n/f, prev 71.2)
The yen rebounded strongly in Tokyo trade after the effect of Standard and Poor's downgrade of Japan's sovereign credit rating on Monday faded and dealers in Asia reacted more to the downbeat news out of the US. The dollar's gains were fleeting and the profit taking in USD/JPY from an overnight high of 132.18 to a low of 131.36 was not surprising given yesterday's selloff from 132.40 and the fact that S&P's move was widely anticipated by the market. EUR/JPY also gave back overnight gains after rising to a high of 116.22 ahead of the Tokyo open and fell back half a yen to a session low of 115.73.
The dollar fell to a day's low of 131.36 but is expected to remain in a range of 130 to 135 for most of the week unless Japanese outflows pick up. USD/JPY should make a strong advance once dealers see that Japanese investors are starting to put more money back abroad. This highly anticipated shift of funds has both encouraged traders to short the yen, and frustrated traders as they wait. But in the meantime, as unrest in the Middle East still captures the market's attention, the dollar should remain on the defensive. Therefore, given the uncertainty hanging over the market at the moment, most traders are becoming skeptical that such flows will occur.
Support for USD/JPY lies around 131.50/55, 131.25 and 131.00. The dollar has again broken back below 131.55 and is now targeting 131.27 ahead of 131.03. A break of 131.00 would be a bearish signal and it could then call upon the 130.16 low. But that would likely be met by verbal intervention as well as interest from speculators anticipating verbal intervention from the authorities.
Therefore, the yen's rise should be contained around 129-130 as Japanese Finance Ministry officials have been talking down the yen since last week's rise to 130.16 against the dollar. That drew a line in the sand at 130 and should generate strong interest in USD at that level. Moreover, Japan is not taking the steps necessary to improve the economy, which means Japan will have to defend a weak yen by telling the markets that the yen should not be excessively strong. Officials are worried a stronger yen would hurt exports, key to any economic recovery. Specifically, government officials will try to keep USD/JPY contained in the 130-135 range. But the real motivating factor for dealers to increase their long USD/JPY positions will come when evidence of Japanese dollar demand resurfaces.
Meanwhile, the market remains flat as many dealers sit on the sidelines ahead of Fed Chairman Greenspan's testimony to Congress on Wednesday where he will speak about monetary policy. The dollar remained in a relatively tight range against the euro and sterling around 88.00 cents and $1.4370 and only a move above 88.80 cents and 1.4430 would increase the bullish tone for the European majors.
EUR/USD rose to a day's high of 88.17 but failure to break above resistance at 88.20 or below support seen around 87.90 has kept trading light. A breakout of this range will be needed to provide better direction for the pair. But as long as the euro maintains above 88 cents it should rally back towards last week's high of 88.44. Looking ahead, heavy resistance is still seen in the 87.50/80 region, which will be tough to break. But a break of the 200-day moving average at 88.84 would open up the door for a run at this year's high of 90.63. Only a move through support at 87.50 and ultimately the uptrend at 87.05 would change the bullish outlook for the euro and provoke a bout of selling due to the large amount of long positioning still built up in the market.
Sterling was unchanged from overnight levels and continues to hover around support at 1.4360 after failing to maintain above 1.44 last week. But support at 1.4360/50 continues to hold and given the overall negative outlook on Wall Street amid poor earnings reports a move above last week's high of 1.4428 would give much needed momentum back to cable and keep the upward trend on track to hit 1.45. Only a fall below 1.4330 would be a negative signal and a move below 1.4280 would be bearish.
Today's data from the UK is expected to show inflation on the rise with RPI-X rising to 2.3% from 2.2% annually. Yesterday's data showed a strong jump in input prices to a two-year high of 2.6% on the month. That brought the annual rate down to -2.5% from -7.2% and was evidence of the large rise in oil prices since March.
Markets will also keep an eye on Germany's ZEW survey which is often followed for its close correlation to the key German Ifo survey due next week. A decline is expected and that could ultimately undermine the euro once the cloud of uncertainty rises from the market and dealers are free once again to compare pure economic data across countries.