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At 8:30:00 AM US July CORE PPI y/y (exp n/f, prev 0.3%) US July Core PPI m/m (exp 0.0%, prev 0.2%) US July PPI y/y (exp n/f, prev -2.1%) US Weekly Jobless Claims (exp 385k, prev 387k) US July PPI m/m (exp 0.1%, prev 0.1%)
The dollar rose sharply in London trade, soaring over one cent against the euro and pound and up one yen in the session. Failure for the European majors to break out of a downward channel against the dollar is weighing on their outlook despite an overnight recovery. The European Central Bank's monthly report today also cited risks to growth while diminishing inflation risks. But what could be weighing on the single currency now is the perception that the Fed may again cut rates in the face of slower growth, while the ECB does not appear willing to cut rates. Also helping the dollar gain on the yen were remarks from Japan's central bank Governor Hayami who said the dollar's decline might be abating.
EUR/USD shed nearly one cent from an overnight high of 97.70 and broke back through support at 97.10 on its way to a session low of 96.75. Technically, the euro is showing increasing signs of weakness as it remains mired in a descending channel. While the euro did bottom above key support at 96 cents on Wednesday and avoided a further selloff, the jury is still out on EUR/USD as euro bulls wait for a break above 98.05/15 which marks the intersection of descending trendline resistance and the 62% retracement of the 99.20 to 96.20 decline. Until then, many traders are likely to wait on the sidelines as a move through this area is necessary to instill confidence in euro bulls after a disheartening correction over the past few weeks. Failure to break out of its decending channel could cause a renewed selloff targeting the 6-week low of 96.20 and key 95.80 support. Below here would likely turn the correction into a trend.
The ECB said in its montly report that risks to price stability had become more balanced. But the central bank failed to say the Eurozone would return to potential growth rate by year end.
Despite the dollar's gains, critics will say that gains came on the back of massive repatriation of overseas assets by US funds. Moreover, today's selling could be seen in the context of traders exiting longs near session highs after a rebound in EUR/USD from Wednesday's low of 96.20. EUR/USD is the most vulnerable given that the most recent CME data shows a considerable overhang in longs compared to the other majors vs the dollar.
Sterling came under newfound weakness, falling below this week's one-month low of 1.5310 and reaching a new low of 1.5250. Sterling's sharp 5-cent sell off this week followed the EUR/USD move with a lag, but is now leading. The break below 1.53 triggered stop loss selling to support at 1.5250. Below here lies 1.5220, and 1.5170 support ahead of the July 5 low of 1.5150. Resistance is seen at 1.5310 and 1.5345.
Hayami talked up USD/JPY today by saying he thought the weak dollar trend may be changing slightly, but exporters keep a lid on gains above 121.00. USD/JPY broke through descending trendline resistance at 120.20 on Tuesday and bounced off that same line now found at 119.95 in Tokyo trade. But selling by Japanese exports keen on locking in a favorable rate has kept the dollar below 121.00 yen over the past two trading days. Until more robust gains in USD are expected, resistance at 121 will prove difficult to break. Initial support is seen at 119.95 trendline followed by 119.50, the 38% retracement of the 125.90 to 115.45 decline. Below 119.50 would target the previous low of 118.60. But a break above 121.15 highs would likely target 121.90, the key 62% retracement of the same decline, and above that would likely test 123.50.
Japan left its overall economic assessment unchanged in its monthly report but the government said it sees higher risks ahead as stocks and the dollar weaken.
Japan's MoF said that foreign investors were net sellers of Japanese stocks for the seventh consecutive week with investors unloading $1.1 billion. But foreigners were net buyers of JGBs.
Today's data from the Eurozone showed GDP was unchanged at 0.3% q/q and 0.3% y/y in Q1 and expectations for Q2 were also unchanged at 0.3%-0.6%. However, the E-12 Q3 Indicator Forecast GDP was cut to 0.6%-0.9% from 0.7%-1.0%
Data from the US is forecasted to show jobless claims steady around 385k, along with benign inflationary pressure. This is not expected to impact the markets as most traders have already turned their 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 say a rate cut may help the market find a bottom from which it can rally, and there is also speculation that the Fed will be seen as willing to act while other central banks wait to feel the effects of slower growth before cutting rates as well. Whatever the case, most see a possible rate cut as benefiting the dollar.