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At 8:30:00 AM US July Import Prices (exp 0.2%, prev -0.6%) US July Export Prices (exp n/f, prev 0.0%) At 3:00:00 PM US June Consumer Credit (exp $8.1 bln, prev $9.5 bln)
The dollar held in a steady range on Wednesday after sharp gains overnight pushed it through key technical levels and forced many dealers to revise their expectations of a continued decline in the greenback. Lack of key data today also added to the quiet tone but talk of a large amount of EUR/USD unwinding to come is seen keeping the pair under pressure. Notably, the clear break of neckline support in the EUR/USD head and shoulders pattern has caused the most consternation for dollar bears. The bulls also took over on Wall Street on Wednesday and an upbeat report by Cisco overnight helped futures higher this morning and is seen supporting the dollar.
EUR/USD outlook soured overnight after the break below 97.10 cents violated a clear head and shoulders pattern, putting a top at 1.02. But there is still hope for the euro if it holds above key support at the 95.80/96.00 area. This area happens to mark the intersection of ascending channel support from 85.65, a previous top and the 38% retracement of the entire rally from 85.65 to 1.02. If the euro can form a base here a rebound back to 97.10 is likely and above it would target parity. But failure to overcome 97.10/20 would likely initiate more selling and a break below 95.80 would signal that the correction has turned into a trend targeting 94 cents initially.
Fears that the US economic slowdown will have spillover effects in the rest of the world supports the view that a double dip is not just dollar negative. This has lead to a further paring back of dollar short positions. EUR/USD is seen the most vulnerable given that the most recent CME data shows a considerable overhang in longs compared to the other majors vs the dollar.
Meanwhile, the market has turned its attention to Friday's productivity data and Tuesday's Fed meeting. Notably, anticipation of another rate cut by the Fed this year pushed the yield on 2-year Treasuries below 2% for the first time ever this week. Dealers also reported a rate cut may help the market find a bottom from which it can rally.
USD/JPY continued to consolidate within Tuesday's range of 120.50 to 121.20 and around the key support/resistance mark of 120.80. A move to either side of this range would give the pair direction, but as long as the dollar can maintain above 120.80, a move to the upside is favored. Resistance is seen at 121.20 and 121.50.
Sterling edged close to overnight one-month lows of 1.5340. Given the sharpness of recent weakness in the European majors against the dollar, a rebound back to 1.5450 would not be unexpected. However, key support/resistance at 1.5560 is seen containing the upside. Support is seen at 1.5340, a break of which would target 1.5300 and 1.5350 congestion.
In their latest inflation report, the Bank of England said it saw RPIX rising to target 2% at the end of 2 year horizon, with risks to the upside. That contrasts with the May report stating risks were for inflation to rise above the target rate. GDP would also go back to its trend rate over the next year, but risks were to the downside given that the global economic recovery is expected to continue at a slower pace. Equity prices may also slow the recovery at home and abroad, said the central bank. The BoE's King said the MPC expects a gradual recovery of the world economy, albeit at a somewhat slower rate than in May."