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At 4:00:00 AM Germany April IFO business confidence (exp 92.1, prev 91.8) At 4:30:00 AM UK March Retail Sales m/m (exp 0.1%, prev 1.5%) UK March Retail Sales y/y (exp 5.7%, prev 5.9%)
The dollar continued to fall since peaking at 130.40 yen in late New York trade, but support at 129.20 is providing a floor and resistance at 129.50/70 will have to be broken to stave off further losses. Meanwhile, EUR/USD stayed rangebound between its overnight 13-week high of 89.29 and 89.07, the 38.2% retracement of the 88.71 to 89.29 advance. Dealers will likely remain on the sidelines until the key German Ifo survey for April is released at 4:00 AM NY time. Anything above the previous 91.8 figure will be seen as bullish but gains in EUR/USD should be contained to the 89.50-90.00 ahead of key US data on Friday.
The dollar continues to show steady erosion in market sentiment as it fell to new 3-month lows against the euro and Swiss franc, and to a 1-month low against the yen. The dollar remains on the defensive for the simple reason that the market is unsure as to where it will get its next strong surge in growth. Yesterday's selloff on Wall Street shows the ongoing concerns about the timing and strength of a US economic rebound. Meanwhile, encouraging signs of growth elsewhere in the world is thought to be enticing capital flows away from the US and towards Europe and Japan.
Therefore, the two key fundamentals to watch this week will be the German Ifo survey today followed by US GDP and consumer confidence on Friday. Given that last week's German ZEW survey showed a setback, the Ifo could follow lower even though market expectations are for an improvement. So, the Ifo can disappoint somewhat without denting the overall EUR/USD bull. Moreover, expectations are for a small rise to 92.1 from 91.8 and meeting or exceeding the forecast would be bullish.
Meanwhile, given the prevailing bearish attitude towards the US and the dollar, the US GDP data on Friday could disappoint if the incredible 5% growth expectation has truly been priced into the US recovery story already and markets do not rally on the news. In 01Q4 there was a sizeable inventory correction and in 02Q1 there was probably a huge inventory rebuilding which is going to add to growth in Q1 expected at 5% this Friday. Therefore, solid growth in 02Q1 could be a disappointment if the market doesn't see it as sustainable. In the end, as Greenspan has stated numerous times, the markets recovery comes down to increased business investment and strong final demand. That is something the market is still waiting for and until it sees that, the dollar could continue to suffer.
From a technical level, the bias remains to the upside for EUR/USD which regained the important 88.70/75 support area overnight and rallied to a new 3-month high of 89.29. Short-term support is seen at 89.07, 89.00 and 88.93, the Fibonacci retracements of the 88.71 to 89.29 advance. A break below 88.93 cents should still hold above 88.85. Look for a break of 89.30 to fuel a move towards 89.50/60. That area should contain the upside ahead of key US consumer confidence and GDP data on Friday.
However, current long EUR/USD positions are at the highest level since the post-9/11 attacks, indicating that the euro could be in store for a sharp reversal if the euro cannot overcome the key 90-cent mark - a key psychological barrier which could cause the market sentiment to shift the burden of proof to the euro from the dollar (see Articles and Ideas 4/19 "Long and Short of EUR/USD").
The fact that USD/JPY resistance at 130.65, the 38.2% retracement of the 132.36-129.60 decline, held up nicely signaled dollar weakness and the failure to maintain above the 130 level targeted key support at 129.60/65 which was broken overnight. Now, USD/JPY is trading in a minute-term downward channel and targeting the 129.20 support area. This is the last key support (61.8% of the 126.32 to 133.82 advance) where major stops are likely to be protected. Trendline support at 129.18 also meets here and a bottom should form for another rally back towards 130.00/50. However, a break of 129.20/00 would trigger stop loss sales for a move towards 128.75 support.
GBP/USD held just below its overnight high of 1.4506 despite sterling weakness against the euro after UK Chancellor of the Exchequer Gordon Brown indicated his preference for a stable and competitive currency, as well as his belief that the euro would recover. Sterling slipped back from overnight 3-month highs around 1.4510 and could not overcome resistance at 1.4477, which marks the 61.8% retracement of the 1.4455 to 1.4510 advance. Failure to overcome this level could result in further losses, but 1.4450 has held up nicely so far and marks the 38.2% retracement of the larger 1.4355 to 1.4510 advance. And only a break below 1.4415 would bring about a decline to 1.4371, the 61.8% retracement of the longer 1.4285 to 1.4510 advance. Here, a base would likely form before a final run at 1.4515, which marks the reaction high hit on January 14.
Therefore, GBP/USD could still target this year's high of 1.4558 but should not rise above trendline resistance at 1.4630. That level should mark an end to the pound's almost 3-month advance from 1.4045 and sterling should then reverse course and target the 1.44 mark ahead the 1.4250/55 level. Technically speaking, any additional longs taken above 1.45 should be met with caution as sterling is expected to be topping in the 1.45-1.4635 area.