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At 2:00:00 AM Germany March Import Prices y/y (exp -2.4%, prev -3.5%) Germany March Import Prices m/m (exp 0.8%, prev 0.5%) At 4:30:00 AM UK April MO y/y prov sa (exp 7.7%, prev 7.8%) UK April MO m/m prov sa (exp 0.9%, prev 1.1%) At 6:00:00 AM E-12 Feb Current Account (ECB) (exp 3.5 bln, prev -1.5 bln) E-12 Q4 Balance of payments 2nd rev (exp n/f, prev n/a)
The dollar edged slightly lower in Asian trade but with holidays keeping the Tokyo market quiet, currencies mostly drifted in a tight range around their NY close on Friday. USD/JPY fell to a new 7-week low of 127.78 but held above stop loss orders expected just below the key 127.75 support. EUR/USD also rose to a new 3-1/2 month high of 90.20 and is now poised to test the 90.37 and 90.66 resistance levels. However, the euro is vulnerable to a sharp retracement if it des not add to current gains given that the weekly IMM Commitments of Traders report showed speculators have racked up record net long positions on IMM euro futures.
The dollar should remain on the defensive this week after the USD index failed to maintain above its 200-day moving average last week after ending the week with 3 consecutive daily declines. Despite an incredible 5.8% rise in Q1 GDP on Friday, sentiment remains bearish after the S&P fell 4.5% in its worst weekly performance since last September. The negative reaction to positive US data shows the market remains apprehensive about final sales and business investment. Until a marked improvement is seen, the dollar could continue its slide.
This year's Trade and Competitiveness hearing on May 1 will also add to the negative sentiment already surrounding the dollar because manufacturers will emphasize the market's growing concerns over US trade policies and the current account deficit, which are directly related to the dollar's strength. This will only increase current anxiety surrounding the dollar and put it under further near-term pressure.
Therefore keep focused on the downside as EUR/USD targets 90.37 (61.8% of 93.35 to 85.63) ahead of this year's high of 90.63. However, remain vigilant about downtrend resistance at 91.05/10 which could prove a formidable barrier to further gains. Reasons for apprehension are (1) Highest net long position in IMM euro futures ever at 29,623; (2) In each of the last 3 occasions in which EUR/USD breached above the 200 day MA, the pair went on to rally by an average of 2.0% before heading down again; (3) The 90.50-90.80 region has often acted as a resistance; January 2, December 17, April 4 and 20, Aug 25 2000; (4) Each time the euro makes it above the key 90-cent threshold, market sentiment shifts the burden from the dollar to the euro.
European dealers in the past few trading sessions have been big dollar sellers. So there is a good chance they could take profits today as EUR/USD is trading near strong resistance levels. A failure to break the current high of 90.20 followed by 90.37 would likely put the pair under pressure. EUR/USD support is seen at 89.95, 89.80 and 89.60. Only a break of the 89.50/60 level would indicate a possible reversal underway. If not, look for the 89.80/90 level to hold before the next move higher.
Data from the Eurozone today is expected to show an improvement in the E12 current account in February to 3.5 bln euro surplus from a 1.5 bln euro deficit. UK data is expected to show UK money supply fell to a 7.7% annual rate in April from 7.8%.
GBP/USD rose to a new 4-month high of 1.4582 in early Asian trade as Wall Street's disappointing performance Friday fueled more worries about issues directly related to corporate accounting, high P/E ratios, and a strong dollar. The market is now strongly concerned that the US recovery will only be modest given that most of the gain in GDP was inventory related.
On Friday, UK GDP came in below estimates at 0.1% in Q1 vs expectations of 0.4%. But sterling rebounded from a low of 1.4508 and broke key resistance at 1.4560 (61.8% of 1.51 to 1.3680) and is now targeting last December's high of 1.4605. Technically, GBP/USD continues to trade in a sharp uptrend but remains vulnerable to trendline resistance at 1.4635. A break of 1.4635 seen targeting 1.4710, 1.4750 and 1.4775. Support is seen at 1.4560, 1.4530/35 and 1.4505. A break of 1.4560 would be the first indication of a reversal unfolding.
USD/JPY has been in a two-yen-wide downchannel for the past month and is now targeting its March 7 low of 126.32. Key support at 127.75 needs to hold in order to prevent a further rapid decline given the only noticeable support is seen at 126.85 ahead of 126.32. Given that current weakness in USD/JPY is mainly a dollar story, bears have been emboldened to test the downside despite official warnings from Japanese officials. Dollar weakness means that despite their wished for a stronger USD/JPY rate, the yen remains weak on a trade weighted basis and above early April lows around 114.50 against the euro. To avoid further downside pressure, the dollar needs to overcome resistance at 128.45 (61.8% of 128.88 to 127.78), then 128.88 followed by 129.00 and 129.40 (61.8% of 130.42 to 127.78) to confirm a notable reversal unfolding.