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At 2:00:00 AM E-12 Germany June Trade Balance (exp 9.9 bln euro, prev 9.6 bln euro) E-12 Germany June Current Account (exp 3.4 bln euro, prev 4.3 bln euro) At 3:00:00 AM E-12 Germany June Industrial Production (exp -3.5%, prev -3.9%) E-12 Italy June Industrial Production (exp -1.5%, prev -1.5%)At 4:30:00 AM UK May Non-Eu Trade Balance (exp -2.0 bln sterling, prev -1.7 bln sterling) UK June Trade Balance (exp -2.1 bln sterling, prev -1.7 bln sterling) At 6:00:00 AM E-12 Italy Q2 GDP prelim (exp 0.3%, prev 0.1%)
The dollar added to an overnight correction against the European majors and yen, giving back about half of yesterday's sharp gains. EUR/USD rose to resistance at 97.10, a session high, while USD/JPY broke above recent one month highs to a new peak of 121.33, before falling back with a weaker dollar all around. The Nikkei rose to close at 9,999 after recently imposed rules against short selling and another rally on Wall Street overnight.
Despite the dollar's setback, failure for the European majors to break out of a downward channel against the dollar is weighing on their outlook. Recent reports from the ECB and BoE cited risks to growth while diminishing inflation risks. But what could be helping the dollar is the perception that the Fed may again cut rates in the face of slower growth, again being ahead of the curve. But confidence in the US is waning as economic data points to deflation, debt and the possibility of a double dip. This has turned traders attention towards today's productivity data and Tuesday's Fed meeting.
EUR/USD rose to a session high of 97.10, a previous low which when broken triggered stop losses to a 6-week low of 96.20, now seen as support. EUR/USD is still below its overnight high of 97.70 and 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 97.90/98.05 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 descending channel could cause a renewed selloff targeting the 6-week low of 96.20 and key 95.80 support and 95 cents.
The dollar received a boost on Thursday from bright economic data and a 3rd consecutive rally on Wall Street. Gains were capped as traders were reluctant to open new dollar long positions ahead of tomorrow's US productivity report and more importantly, next week's Federal Reserve Policy Meeting.
USDJPY edged up to a session high of 121.33 amid mixed data from Japan and the view that Japan could suffer from slower than anticipated global growth. The IMF released its report of the Japanese economy, forecasting a 0.5% contraction in economic growth and a 1.0% decline in CPI for 2002, showing deflation was still rampant in the economy. The IMF urged the BoJ to heighten its efforts to curb deflationary pressures, adding that the BoJ's expansionary monetary policy was unlikely to bolster falling prices. Moreover, the fund also advocated a neutral stance in fiscal policy in the near term and additional reforms in the financial sector. Japan PM Koizumi agrees with the report, stating the Japanese economic situation continues to be severe and wants to push forward with reforms to revitalize the economy.
USD/JPY move above recent highs at 121.20 bodes well for the dollar and could signal a renewed move towards the 122 level in coming days if support at 120.75/121.00 holds. This area has marked key resistance in recent days due to selling by Japanese exporters keen on locking in a favorable rates. Support is seen at 120.20 and 119.60, the 38% and 62% retracement of the recent rally from 118.60. Below 119.50 would target the previous low of 118.60. But a break above 121.30 highs would likely target 121.90, the key 62% retracement of the same decline, and above that would likely test 123.50.