The dollar recovered from sharp losses on Tuesday after being sold heavily for the security of the current account surplus currencies, yen and Swiss franc. Hawkish comments from the Bush administration on Monday put the dollar in a weak position ahead of key economic data overnight including durable goods orders and consumer confidence. Therefore, despite a record setting rise in non-defense durable goods, the market punished the dollar following a sharp drop in consumer confidence. Given that renewed confidence had set the tone for a stronger dollar, more hawkish rhetoric and/or weak economic data will likely further undermine the dollar this week.
EUR/USD held near a one-week high of 98.33 with resistance seen at previous highs of 98.45 and the key 98.70 level. Fibonacci resistance is seen at 98.40, the 38% retracement of the decline from 1.0201 (July 18) to 0.9621 (August 6) and 99.10, the 50% retracement of the aforementioned move. Therefore, look for a test of 98.70 today with a break opening the way for 99.10 and 99.90. Meanwhile, a weak German Ifo survey could test support at 98-cents, followed by 97.70, and the key levels of 97.30 and 97.00. For the bullish momentum to remain, these last two levels need to hold.
Of key interest today is the German economic institute IFO's business confidence index, which is expected to post a decline for the third straight month. Consensus forecasts predict a reading of 89.0 for August from 89.9 in July. The ZEW's expectations indicator, often regarded as an omen of the IFO index, showed the sharpest decline in two years when it was released earlier in the month. Continued sluggishness in the Eurozone's largest economy is weighing on the region and its single currency. Therefore, the market's reaction to further weakness in the Eurozone's largest economy will be key to understanding current sentiment in EUR/USD.
Cable also rose above trend line resistance at 1.5290, located on the downward trend line extending from the 1.5866 high (July 25) through 1.5729 (August 2nd). Resistance at 1.5335 is currently preventing sterling from making further headways in the interim. Key resistance lies at 1.5415, 62% of the rally from 1.5143 (July 5) to 1.5866 (July 26). On the downside, support is found in 1.5210-1.5225 range, wherein lies the 200-week moving average and the neckline of the head and shoulder formation. Renewed sterling selling could carry cable down to the July 5th low of 1.5143
USD/JPY regained earlier support at 118.15 and rose to a session high of 118.50 after it fell by almost 200-pips overnight, triggering stops to a 1-week low of 117.95. Rumors of seasonal repatriation helped drive the yen higher overnight. Also helping to boost the yen were comments from Japan EcoMin Heizo Takenaka hinting at larger than expected tax cuts. Takenaka stated that the proposed 1 trillion yen tax cut may not be enough and added the government may consider revising growth forecast after seeing Q2 GDP, which will be released on Friday.
Japan's seven leading think tanks are estimating that the preliminary number for Q2 GDP grew by a mere 0.2% from the previous quarter according to the Cabinet Office's new formula. The seven think tanks believe that economic growth was mainly attributable to exports, which they estimated to have grown 4-7% from Q1.//www2.forexnews.com