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At 8:30:00 AM US Feb Int. Trade (exp -29.3 bln, prev -28.5 bln)
The dollar fell sharply across the board in London trade in thin markets as most dealers were sitting on the sidelines ahead of Fed Chairman Greenspan's speech later today. Technical factors were at play today which encouraged some traders to push through stop-loss levels, triggering a large decline in the dollar to 3-month lows against the euro and sterling. USD/JPY was also affected, falling to a low of 130.72, below key support at 131.00.
Secretary of State Powell's press conference this morning gave little hope in the way of a Mideast cease-fire. Therefore, with the violent situation little changed, the dollar will continue to suffer in the near-term despite robust economic data.
Markets will focus on earnings reports and Fed Chairman Greenspan's speech before Congress this afternoon about monetary policy. Despite expectations that the Fed will not raise rates until after the summer, traders will look for clues as to when the central bank might begin to raise interest rates and Greenspan's view of the economy. Uncertainty about what Fed Chairman Greenspan will say today weighed on the dollar and international investors are likely to keep money out of the US markets until the smoke clears and they feel they can trust the US again. Greenspan will likely sound a cautiously upbeat note about the recovery and downplay interest rate hikes. Whether this is dollar positive or negative will depend much on how the US asset markets react. Tuesday's rally in the Dow and Nasdaq was important given that it was mainly due to positive earnings, however the rally was also due to an oversold market. Therefore, today's reaction on Wall Street is likely to dictate the direction of the dollar.
Today's data is expected to show that the US trade deficit increased to 29.3 bln in February from 28.5 bln. This will only highlight the dependence of the US on foreign capital inflows, which have dried up with fading interest in US stocks and government bonds.
EUR/USD rose to a day's high of 88.89, just above its 200-day moving average of 88.85 and equal to its January 22 reaction high of 88.89. After breaking out of yesterday's tight range from 87.90 to 88.20 the dollar was able to break key technical resistance around the 88.45/50 area and the slow bull gained some needed momentum. If the euro can overcome resistance at 88.85/90 area it would then open up the door for a run at this year's high of 90.63. This is a likely scenario given the uncertainty which clouds the outlook for the US economy. However, if the euro rises above 90 cents this week, the market will shift its focus to the euro and questions about its viability to sustain gains will be questioned. As in the past, this has caused a selloff in EUR/USD when dealers become disappointed in the stalling bull.
Support is seen at 88.60, 88.40, 88.15/10, 87.90/85, and 87.75/70. But only a move through support at 87.50 and ultimately the uptrend at 87.10 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.
The dollar also broke below key support in the 131.00 area which marked both trendline support and the 61.8% retracement of the move from 130.18 to 132.40 high. The target now is for support at 130.20/05, which should hold given that Japanese officials would probably show more verbal intervention, and speculators anticipating this verbal intervention would promptly buy dollars around the 130 level. However, this does not mean further losses are impossible, just that Japanese officials have voiced their discontent over a stronger yen. Bears will be on alert for official protests around this level, but with the G7 meeting coming up Japan may decide not to try talking down the yen so forcefully, which could put 130 under pressure triggering stop loss sales. Since Japan has been slow to implement reforms like it promised, there is a strong chance that they will want to avoid criticism for pursuing the only thing left a weak yen.
If the dollar continues to come under pressure across the board, USD/JPY could ultimately target 129.65 and 129.20, which marks the 61.8% retracement of the larger 126.32 to 133.82 advance as well as trendline support.
Today's data from the UK had little effect on the pound despite unemployment falling to a new 25-year low below 1 million and around 5.1%. The BoE's unanimous decision to keep interest rates on hold also had little sway over the pound.
Sterling broke from a tight range against the dollar between support at 1.4360 and resistance at 1.44 overnight and rose in tandem with the euro to a day's high of 1.4460. Cable's rise was more a factor of euro strength given that EUR/GBP rose to a day's high of 61.51 from 61.25. Nevertheless, this gave much needed momentum back to the bull and cable is now looking test trendline resistance at 1.4453. Support is seen at 1.4410, 1.4385, 1.4335 and 1.4285. Only a fall below 1.4335, which marks the 61.8% retracement of the 1.4285 to 1.4410 move would be a negative signal and a move below 1.4280 would be bearish.
USD/CHF fell to a session low of 1.6551 after peaking at an overnight high of 1.6720 following a break above 1.6693, which marks the 61.8% retracement of the 1.6774 to 1.6560 decline. The failure to maintain above 1.6693 indicates a top has formed at 1.6720 and the pair should has now pushed through support at 1.6625/20 and bounced off support at 1.6560/55. A break of this level is seen targeting 1.6520/15 ahead of 1.6356 reaction low. Dealers remain apprehensive about the dollar's chances against the franc given the prevailing uncertainty. Therefore, any rebound is seen limited at 1.6730 followed by 1.6774.