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The dollar traded steady in London today after a sharp rally on Tuesday carried it to a one-week high of 98.40 cents against the euro and 117.90 yen. Today's action saw the greenback mostly unchanged from previous levels amid continued declines in US equity markets and a negative outlook from equity futures this morning. Therefore, with some more room to the downside in US equities, the dollar could suffer from increased pessimism over the coming days. Moreover, with Tuesday's rally based mostly on short covering, it is difficult seeing the dollar rally continuing from a fundamental perspective.
However, from a technical outlook, the euro and yen are both expected to give up further ground against the dollar in the short run. This is because the dollar was acting like a one-way trade for the past few months with the other currencies only serving as a vehicle to sell dollars. So with little reason to buy euro or yen based on fundamentals, they got whip lashed yesterday by dollar short covering. Some traders have also revised their short-term outlook for the dollar, saying the euro could test 97 cents, while the dollar may rise as high as 120 yen in the near term.
With no key economic data until Thursday's durable goods and jobless claims, the FX market will remain focused on Wall Street and corporate earnings. Today's key reports will come from AOL Time Warner and Dupont.
Business surveys from Europe today came in much worse than expected as Italy's June Business Confidence index falls to 93.9 from 95.3, against expectations for a rise. UK Q3 CBI Quarter Business Confidence also falls to 4.0 from 21.0. This is likely to put the key German Ifo monthly survey in focus with the possibility of a decline in July instead of holding steady at 91.3. Meanwhile, preliminary German inflation data from the Hesse region rose sharply in July by 1.2% from 0.9% in June on an annual basis as higher wage agreements look to start putting upward pressure on inflation in the coming months.
EUR/USD held above its overnight one-week low of 98.45, but struggled to maintain above key technical support at 99.00, which marks the 62% retracement of the rally from 97.13 to 1.0201. Technically, the first indication that EUR/USD topped out at 1.02 was a break below key support at 1.0025/30. Violation here blew past parity, then hovered at 99.65, before coming under further pressure. The 99.65/80 area now marks resistance and will have to be overcome to avoid targeting its overnight low of 98.45 ahead of congestion around 98.00/30 and the previous low of 97.13. Resistance is seen at 99.65, 99.80 and 1.00, but should not pass 1.0030. A move above here would put the upside back in target.
Sterling mimicked the movements in EUR/USD and hovered around 1.5640. On Tuesday, Cable followed the moves in EUR/USD and fell below 1.57, which happens to mark the 62% retracement of the 1.5615 to 1.5845 rally. A break below this key technical support opened the way for further declines and reached a low of 1.5555 before recovering. Resistance is seen at 1.5680 and 1.57. Only a move above 1.5740, the 62% retracement of the 1.5845 to 1.5555 decline would put the upside back on track.
Meanwhile the Nikkei ended below the 10k level for the first time since February as it followed Wall Street lower, countering a barrage of comments from officials last night which tried to talk up Tokyo shares.
USD/JPY fell to a session low of 116.94, but maintained above support at 117.00, which marks the 38% retracement of the 115.50 to 117.90 rally. Key support lies at 116.45, the 62% retracement of the same move and as long as the dollar holds above this level it should add to recent gains. Resistance is seen at 117.90 and 118.35.