Daily Market Analysis May 14th 2008
Key events for the next 24 hours
| Time (GMT) |
Data release/event |
Previous |
Consensus |
09.30
|
UK Bank of England inflation report
|
|
|
12.30
|
US consumer prices (headline)
|
0.3%
|
0.3%
|
12.30
|
US consumer prices (core)
|
0.2% |
0.2%
|
Key factors to watch
The US consumer prices data will be closely watched on Wednesday and a high reading would increase pressure for the Fed to hold rates steady in June.
Comments from US Fed officials will remain in close focus in the short term.
The commentary on currencies from European and US officials will also need to be monitored very closely
Oil and commodity-price trends will continue to have a significant market influence.
Support/Resistance levels
| |
EUR/USD |
USD/JPY |
GBP/USD |
| |
|
|
|
| Resistance |
1.5600
|
108.10
|
1.9740
|
| |
1.5510
|
107.20
|
1.9610
|
| |
1.5430
|
105.80
|
1.9500
|
| |
1.5405 |
105.30 |
1.9410 |
| Support |
1.5360
|
105.05
|
1.9400
|
| |
1.5230
|
104.30
|
1.9330
|
| |
1.5190
|
103.60
|
1.9220
|
Current spot level is in bold type
09:15 AM GMT Overall strategy: US and European officials are likely to persist with their verbal rhetoric in favour of a stronger US currency in the short term. There is scope for a further US currency attack on important medium-term technical levels below the 1.54 level against the Euro with a possible medium-term move towards the 1.50 level.
Market analysis
Euro/dollar:
Although fragile, confidence in the US economy is likely to remain slightly stronger in the short term as the data has remained slightly above market expectations and has not signalled further deterioration at this stage. Fed officials are also focussing slightly more on inflation pressures which will reinforce expectations that rates will not be cut at the June meeting with yield spreads providing dollar support. The comments from US and European officials will continue to be monitored very closely in the short term and there is likely to be a further promotion of a dollar recovery by key officials. Dollar sentiment will still be very fragile with the firm ECB stance supporting the Euro, but there is scope for a further overall dollar advance towards 1.5350 and possibly 1.5220 in the near term.
|
The dollar found support close to 1.5570 against the Euro on Tuesday and edged stronger in European trading. Headline US retail sales fell 0.2% in April, in line with market expectations, while the underlying figure was stronger than expected with a monthly increase of 0.5%. Auto sales dipped sharply, but there were some areas of strength with a recovery in building materials sales and the latest weekly Redbook sales report was also firm.
Fed Governors continued to express concern over the inflation outlook, although they were also cautious over growth trends. Overall, the data and Fed comments will maintain a slightly more optimistic tone over the US economy and futures markets continued to price out a further interest rate cut for the June FOMC meeting. Overall yield spreads between the dollar and Euro narrowed to a two-month low which helped underpin the US currency. The dollar strengthened to highs around 1.5430 following the US retail sales data, but was unable to sustain the advance and drifted back towards 1.55.
The Euro was hampered by further dollar-supportive rhetoric by European and US officials. EuroGroup head Juncker stated that G7’s message had finally been heard and that he hoped the trend would continue which clearly suggested that officials are looking for the US currency to recover further. Fed Governor Fisher also stated that the dollar should strengthen. Following the persistent rhetoric, the Euro edged weaker, although with no decisive move as Euro-zone growth uncertainties persisted. The dollar edged stronger in early Europe on Wednesday as sentiment remained slightly firmer with the Euro dipping towards the 1.54 level.
Yen:
The degree of risk appetite are likely to remain slightly stronger in the short term with reduced fears over the global credit markets. Caution will certainly persist and fears could revive quickly, but overall yen demand is liable to remain lower in the short term which will help underpin the US currency and allow it to challenge resistance levels. There will be an increase in exporter dollar selling above the 105.0 region and the US currency will continue to face selling pressure above this level, but there should be solid support close to the 104.0 region and a challenge on 105.80 is realistic.
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The US currency advanced further following the US data on Tuesday. Comments from Fed Chairman Bernanke, who stated that financial-market conditions were generally improving, were also slightly negative for the yen, although he also stated that market conditions were far from normal which prevented the dollar tackling major resistance levels.
Overall risk appetite strengthened and the dollar pushed to a high of 104.75 in New York as there was fresh market interest in carry trades. There was still some degree of caution with volatility levels higher and this discouraged heavy yen selling.
The Japanese wholesale price increase of 3.7% in the year to April did not have a significant impact with markets not expecting any Bank of Japan response. The dollar was still hitting tough resistance above the 105.0 region on Wednesday with a peak close to 105.20.
Sterling:
The high inflation data will make it more difficult for the Bank of England to cut interest rates and yield factors will provide theoretical Sterling support. There will, however, be increased fears over the economic outlook with recession speculation liable to increase, especially after the unemployment data. In this environment, sentiment towards the currency will remain generally negative in the short term. The Bank of England inflation report will be very important for immediate direction on Wednesday and a tough stance would provide some initial Sterling support. Overall, the Euro still offers poor value at current levels against the UK currency. Sterling will look to find near-term support near 1.94 against the dollar, but overall rallies will quickly attract selling pressure given weak sentiment.
|
Sterling remained under pressure on Tuesday with the high inflation data providing only fleeting support. Although there were reduced expectations of a near-term cut in interest rates, overall fears surrounding the UK economy increased with greater fears over recession. Sterling dipped to lows around 0.7975 against the Euro and was trapped below 1.95 against the dollar.
The quarterly inflation report will be watched closely on Wednesday to assess the bank’s likely attitude towards interest rates. Higher inflation forecasts will not provide strong Sterling support if the bank also downgrades growth forecasts. Overall sentiment remained weak with the UK currency slightly lower against the dollar on Wednesday, but it did survive an initial test of support below the 1.94 level against the US currency.
The UK claimant count increased by 7,200 in April after a revised 3,600 increase the previous month and the back-to-back increase will increase expectations of a sharp slowdown in the economy. It was also the biggest unemployment increase for two years. Average earnings growth, however, rose to 4.0% from 3.7% which will maintain Bank of England unease over inflation.
Swiss franc:
Overall demand for the Swiss currency is likely to remain at lower levels in the short term as risk appetite improves. The Swiss franc should still secure some protection against the Euro from expectations that yield spreads could narrow within the next few months. Overall, the Euro is liable to face tough resistance close to the 1.6350 level against the Swiss currency. The dollar should retain a firm tone against the franc with a move towards 1.07 realistic over the next few days, but is likely to face further pressure close to the 1.06 level in the near term.
|
The Euro pushed to highs near 1.63 against the Swiss currency on Tuesday. Although it weakened back to 1.6265 as Wall Street failed to sustain an initial advance, the franc remained subdued in US trading and the dollar held above the 1.05 level.
The franc was unsettled by a recovery in risk appetite as Fed officials were optimistic that the credit crunch was at least easing. There was some speculation that the gap between Euro and Swiss interest rates would narrow over the next six months and this will provide some near-term franc support. The dollar held firm on Wednesday with a push to highs around 1.0580.
Australian dollar:
The Australian dollar held broadly steady on Tuesday, but was unable to make any strong upward progress as the US currency was relatively firm with selling pressure towards the 0.9450 level. The domestic data was weaker than expected with the first-quarter wages increase held to 0.9% and this dampened expectations of higher interest rates. Global trends still dominated markets and a firmer US dollar trend unsettled the currency with a retreat to around 0.9340 in early Europe. Commodity-price trends will trigger further short-term volatility and there is likely to be further short-term selling pressure above the 0.94 level.
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Canadian dollar:
The Canadian dollar held firm on Tuesday and challenged levels below parity against the US dollar. The latest spike stronger followed a fresh surge in oil prices to record levels on rumours of an Iranian production cut. The Canadian dollar was unable to sustain the gains and weakened to 1.0055 in early Europe on Wednesday as the US currency strengthened while oil prices retreated from peaks. Overall, the Canadian dollar is likely to hit further tough resistance towards parity with the threat of a Canadian retreat to the 1.02 region over the next few days.
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Disclaimer: TodayFX and partner's market analysis is not investment advice and must not be taken as recommending particular market positions.We can take no responsibility for any actions taken by investors.
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