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At 8:30:00 AM US June Import Prices (exp -0.2%, prev -0.7%) US June Export Prices (exp n/f, prev n/f) At 10:00:00 AM US May Wholesale Inventories (exp -0.2%, prev -0.7%)
European dealers set the tone for today's action by selling the dollar aggressively across the board. Cable hit a new 26-month high of 1.5530 in early London trade and is up 4 cents since Friday. EUR/USD hit a session high of 99.70 while USD/JPY fell to a new 10-month low of 117.65 before traders eased up on the dollar. Current positioning leaves the dollar vulnerable to further weakness, which will again put Wall St in focus. Asian and European bourses were in the red on Wednesday after U.S. shares tumbled overnight and with US investors on the sidelines due to waning confidence, foreign investors continue to stay away as well which is weighing on the dollar. US equity futures are mixed meaning this mornings open could take direction from yesterday's afternoon selloff which left the Dow near the key 9000 level, while the NASDAQ fell back below the 1400-level, shedding 24 points to close at 1381. Despite last Friday's rally, the rate of deceleration in US equities remains constant since March and that will keep downward pressure on the greenback.
Overnight losses on Wall St indicate that investors found no comfort in Pres Bush's speech on corporate responsibility. The growing consensus that the later half of the 1990s was rife with aggressive accounting and that many more frauds may have yet to surface should keep the dollar down over the medium term. This is an unquantifiable risk to the market and with valuations still at historically overbought levels, US equities may continue to decline. In fact, investors have sold into the rallies in both the dollar and US equities since April, keeping the downtrend intact.
Making headlines this morning are changes to the S&P index which is slightly dollar positive given that 7 foreign firms were dropped and replaced by 7 US companies. Portfolio managers tracking the index will have to adjust their holdings which may end up supporting the dollar. However, the initial reaction by traders this morning has been to sell the dollar, not buy.
EUR/USD rose to a one-week high of 99.70, passing its overnight peak of 99.50 but heavy option-related selling around 99.90 cents continues to prevent EUR/USD from reaching parity. Given the lack of key data from the Eurozone and the US today the pair will likely take direction from Wall St. Another down day could depress sentiment enough to retest 99.90. But failure here could lead to another round of profit taking targeting 99.20 ahead of 98.70, the 38% retracement of the 97.10 to 99.70 rally. Follow up support is seen at 98.40 and 98.20 which should contain any correction lower before another attempt at 99.90 highs and parity.
Data from the Eurozone showed an upward revision in Q1 labor costs to 3.9% from 3.7%. UK May manufacturing output rose much more than expected at 0.7% on the month compared to the average forecast of 0.1%. Industrial output was also much higher than expected at 0.9% m/m. Market reaction muted given the early run up in GBP and the strong trade numbers (high exports to US mostly) from yesterday which hinted at better output growth over the same period.
Cable hit a new 26-month high of 1.5530 in early London trade, which is just above 1.5520--the 50% retracement of the decline from the 1.7354 high (Oct. 98) to 1.3680 low (June 01) but subsequently fell below this level. Cable is up 4 cents since Friday and risks a larger correction but penetration above 1.5520 opens the way for 1.5550 and 1.5600 before becoming overextended.
USD/JPY broke back below 118 and passed its overnight 9-month low of 117.75 to reach a session low of 117.65. But support at117.55-60 contained today's selloff. Follow up support is seen at 116.90, where the 200-week moving average lies. Moreover, traders are reluctant to sell dollars below this area following MoF's Mizoguchi who said that it is unfavorable for dollar to fall to the 117 level and appropriate measures in the Forex market will be taken if needed. Intervention fears should slow the dollar's decent against the broadly stronger yen and could engender profit taking which would send the pair higher. Resistance starts at the previous intervention level of 118.35, then subsequently at 118.80-85 and 119.00.