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At 8:40:00 AM US Redbook (exp n/f, prev 0.4%) At 9:00:00 AM US BTM/UBSW sales (exp n/f, prev 1.4%) US New York NAPM (exp n/f, prev 252.2) At 10:00:00 AM US April Chicago PMI (exp 55.6, prev 55.7) US April Consumer Confidence (exp 108, prev 110.2)
Light trade ahead of May 1 European holidays and plenty of offers above 90.40 cents (related to option plays) kept the euro's upside in check, encouraging dealers to square up ahead of key data later in the day as well as uncertainty surrounding Treasury Secretary O'Neill's defense of the strong dollar and probable strikes by IG Metall on Wednesday. The market has its eye on key consumer confidence data which is expected to decline to 108 in April from 110.2. After last Friday's surprise fall in the Univ of Mich sentiment survey, the dollar could come under further pressure if today's data adds to concerns over the US economy.
EUR/USD fell to a day's low of 90.07 after offers related to option plays kept a lid on 90.40/45 resistance. The market remains susceptible to a reversal if current highs cannot be overcome. However, there was plenty of demand around 90.00 (50% of 89.60 to 90.45) and only a break of 89.90 (61.8% of 89.60 to 90.45) and 89.60 would damage the bull. Therefore, look for a break of either 90.40 or 89.60 for a near term bullish or bearish leaning. Only a move above 90.40 would put the bull trend fully back on firm footing, clearing the way for a move through 90.50 and the year's high of 90.63.
US consumer confidence and Chicago PMI could get the market going again if as expected they edge lower and bring further pressure on the idea of a strong US recovery which would hurt the dollar.
The US Treasury has also turned around its plan to pay down USD89bn in debt and will instead need USD1bn in the first quarter as tax revenues have been substantially below expectations. The effect of higher borrowing implies prices will fall, giving less incentive to buy US debt and could further weigh on the dollar.
Market also nervous ahead of O'Neill's hearing before the Senate on May 1 which could 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 would only increase current anxiety surrounding the dollar and put it under further near-term pressure.
Today's European showed February retail sales rose 0.5%, above expectations of a decline and carried the annual rate to 1.3% from 0.7% previously. French unemployment rose to 9.1% in March from 9.0%, above expectations.
Flash April inflation fell as expected to 2.2% from 2.5%. But the bigger worry is that the ECB will be concerned over the possible strike by IG Metall in Germany on Wednesday. Moreover, the union is apparently now returning to their original demand for a 6.5% wage increase, much more than the settlement around 4% on the table last week during negotiations. While this will not have a direct effect on the ECB (who on Thursday will likely keep rates unchanged at 3.25%), it will highlight the fact that the Eurozone still has structural difficulties to overcome if the euro plans to advance further against the dollar. The wage hike could also have a dampening effect on the already weak German recovery (expected around 0.8%-1.0% this year), which could spoil the current euro rally.
There is also talk that key downtrend resistance at 91.00/10 could prove a formidable barrier to further gains. It is important to note that the market is very aware of this level so it may try to break out, but could fail and prove to be a false break which could then lead to an actual reversal. The historical case for this particular consolidation pattern (a symmetrical triangle) warns of such false breakouts and shows that most trends continue in the direction of the prior mega trend, which is down in the EUR/USD case.
Other reasons to remain vigilant about downtrend resistance at 91.05/10 are (1) Highest net long position in weekly 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.
USD/JPY broke above an overnight high of 128.34 (reaction high) and then above 128.40 (61.8% of 128.87 to 127.63) to reach a day's high of 128.47. If the dollar can maintain above this level it would be a positive sign and reduce the chances of another leg lower, below yesterday's 7-wekk low of 127.63. To avoid further losses, USD/JPY needs to maintain above 128.40 to target the 128.87 reaction high. Only a break there would discourage yen bulls.
GBP/USD fell to a day's low of 1.4556 after failing to overcome key trendline resistance at 1.4635 overnight. Key Fibonacci supports (near and long term) are seen in the 1.4550/65 area and a break below would be the first indication of a reversal unfolding. However, this area held up nicely today which means another run at 1.4635 cannot be ruled out. A break of 1.4635 is seen targeting 1.4710, 1.4750 and 1.4775.
USD/CHF may have found support above 1.6180, which marks a key long-term trendline support. But today's rally was rejected right at 1.6250 (38.2% of 1.6345 to 1.6175). This indicates the dollar did not have the momentum to break free of its recent downtrend and upside remains limited by 1.6280 (61.8% of 1.6345 to 1.6175) and 1.6345 (reaction high). A move above 1.6345 would be a good signal for the dollar whereas a close below 1.6180 would be a bearish signal to traders and further weigh on the dollar against the other EuroFX.