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The euro failed to gather enough momentum to advance towards parity, stopping short of the intended goal by 30-pips before diving below 99.00. The dollar was less successful in recouping its losses against the yen and fell lower to 117.40, bruised by the unending woes on Wall Street.
After a two day climb, the euro posted a striking decline despite Wall Street's tumble to multi-year lows. EURUSD fell as much as 1 cent off its session high of 99.69, testing the 98.70 support level, which is the 38% retracement of the rally from 97.1 (July 5th) to today's high. Subsequent support seen at 98.45-50. The immediate resistance starts at 99.10-15, followed by 99.45-50 and 99.70. Given the malaise in European bourses and weak fundamentals, it is unlikely that the euro will hit parity in the immediate days unless a significant amount of buying pressure congregates.
The ECB went on the defensive against the failure of several EMU countries to commit to the Stability Pact. France's new center-right government passed a new budget with provisions including an income tax cut at the risk of violating the 3% limit set under the EU Stability Pact. Italy, Portugal, and Germany have also fallen under the European Commission's scrutiny for not matching targets for budget deficit reduction. ECB council member Klaus Liebscher reprimanded member countries' efforts to evade balancing their budgets by 2004 as called for in the Stability and Growth Pact was damaging the credibility of the policy and hurting the euro. French Finance Minister, however, suggested that the EMU convergence time frame should be extended past 1 or 2 years to a long term goal, undermining Lisbscher's comments.
Ignoring earlier statements by the MoF officials' renewed opposition to a USDJPY below 117, traders bid up the yen from 118 down towards the 117 figure as the U.S. equity market accumulated more losses. Yen breached the 117.55-60 support level and is now retesting it as a resistance level. Resistance lies at 118, followed by the 118.35 intervention level. The next key support is found at 117, slightly above the 200-week moving average of 166.90, after which BoJ intervention becomes a genuine threat.
UK fundamentals are looking in better shape that those of the Eurozone, helping Cable's recent gains across the board. Sterling reached a new 26-month high vs. the dollar today at $1.5530 after the release of an upbeat British May Manufacturing production rise of 0.7%, above the 0.1% expected level. The National Institute of Economic and Social Research also came forward with a positive Q2 GDP growth estimate of 1.2%. While EURGBP reached a 32-month high of 0.6525 on June 25th, the peak proved unsustainable as UK economic indicators have outshone comparably weak data from the Eurozone. Cable hovers near today's latest 26-month high of 1.5530, breaching above 1.5517--the 50% retracement of the decline from the 1.7354 high (Oct. 98) to 1.3680 low (June 01). 1.5616 stands as the next key resistance, the Mar. 24, 2000 low.
The Swiss franc edged up to a high of 1.4930 then fell to 1.4868. Support starts at 1.4800. Key support stands at 1.47, which is the 50% retracement of the decline from the 1.128 low (April 1995), to the 1.8307 high (Oct 2000). Resistance stands at 1.5070. A break above it could lift momentum to 1.5100-the 38% retracement of the decline from the 1.5710 high to the 1.4738 low. Subsequent resistance found around 1.5180, which is just below the trend line extending from the 1.6168 low (June 2002) through the 1.5895 low (Jan. 2001), the 1.5590 low (Sept. 2001).
U.S. May Wholesale Inventory beat expectations of a 0.2% drop and instead rose by 0.1%, an increase for the first time in a year. Although Wholesale Sales fell 0.2%, the pick up in inventories indicates that inventory depletion has bottomed out and that suppliers are anticipating a more positive business outlook.
The U.S. stock market plummeted yet again today on misgivings about corporate earnings and news that Qwest is under criminal investigation for undisclosed reasons. The Dow closed under the critical 9000 level for the first time since October 2nd, at 8813, a 282-pt loss or 3%. Despite a reshuffling of the S&P 500 to give greater weight to U.S.-based companies, the index plummeted 3.4% or 32 pts. to close at 920, the lowest level since October 1998. NASDAQ turned in a miserable performance as well to close at 1346, a 3.3% drop from yesterday.
Thursday's data will start off with the current account balance from Japan as well as the government's economic assessment expected to show another upgrade. The current account surplus seen slipping to 1.08 trln yen from 1.085 trillion yen followed by May UK housing starts. US markets will get the June PPI figure expected flat from a previous decline of 0.4%, with the core figure (excluding food& energy items) seen showing a rise of 0.1%, suggesting that the core of the decline in the headline figure stems from falling oil prices in June. This also explains today's release of the bigger than expected 0.6% decline in June import prices. These data items support the notion that inflation worries are a non-issue for the Fed as far as the oil front is concerned. Markets will see a slight run-up in weekly jobless claims seen up to 387K from the prior 383K, still showing a reading of less than 400K for over a month.