The dollar continued to consolidate in London trade after a harsh selloff overnight left it at one-week lows against the majors. A third consecutive decline in the German Ifo also kept the euro from gaining the upper hand. But the greatest risk this week would be to read too much into market moves given the thin summer trade. EUR/USD maintained around the 98-cent handle, while USD/JPY held above 118.00.
The dollar was slightly higher on Wednesday after traders pared longs on Tuesday for the security of perceived safe havens like the yen and Swiss franc. Hawkish comments from the Bush administration on Monday night 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 consumer spending represents nearly two thirds of economic growth, the drop in confidence is likely to keep the tone bearish this week.
EUR/USD fell back to a session low of 97.93 ahead of the key German Ifo survey, but subsequently rebounded after the headline figure came close to expectations, falling to 88.8 from 89.9. The market's reaction to further weakness in the Eurozone's largest economy was minimal given that it was in line with forecasts. But the implication is that risks are for the German economy to remain weak. Moreover, the Ifo's Nerb said it would now be hard for the economy to even reach the earlier estimate of 0.7% growth for this year.
Keeping a floor under EUR/USD this morning were US equity futures which were in the red after a down day on Wall Street overnight. Further weakness in stocks would likely pressure previous highs at 97.45, 98.70 and 98.90. 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, as long as 97.70 holds, look for a test of 98.40 today with a break opening the way for 98.90. Above here is key and the market would likely head for 99.10 before backing off from 1.00.
But a rebound on Wall Street could put key support at 97.70 at risk of being broken. A break below that level would open the way for the key levels of 97.30 and 97.00. For the bullish momentum in EUR/USD to remain, these last two levels need to hold.
The Swiss franc soared in early morning NY trade on Tuesday, rising across the board to one-week high against the euro, sterling and dollar. Remarks from VP Cheney that a war with Iraq is necessary to ensure against a possible nuclear threat, and White House spokesman Fleshier's admission that Pres Bush would not ask Congress for approval, puts the Iraq story in the forefront of the market's psyche. War is a great risk given ongoing concerns over the US economic recovery and the costs of such an endeavor. Moreover, in its latest Economic and Budget report, the Congressional Budget Office said on Tuesday the dollar may continue to decline, though rapid erosion is unlikely to occur. The report cites the concerns surrounding U.S. growth and the ballooning current account deficit as contributing factors to the greenback's broad depreciation.
On Tuesday, the Nasdaq crossed back below its 50-day MA, the first of the major indices to do so since they all crossed above here last week. Techs were led lower by a weak business outlook from Intel, but retailers were also hit yesterday on the perception that consumers may be losing the desire to spend. Looking ahead this week is Q2 GDP (revision), U of Mich sentiment survey, Chicago PMI and personal income/expenditure data for the market to absorb. With the market in a more or less undecided frame of mind, it is imperative that equity markets continue to post modest gains before trade begins to pick up after Labor Day.
Sterling edged off of a new one-week high at 1.5358 after breaking above the previous day's high of 1.5350 in London trade. Support is seen at 1.5310 while key resistance lies at 1.5415, the 62% retracement of the rally from 1.5143 (July 5) to 1.5866 (July 26). Follow up resistance is seen at the previous highs of 1.5440 and 1.5470. Only a break of key support at 1.5165, which marks the 38% retracement of the 1.4038-1.5864 rally would be of major consequence. Below 1.5165 would show a clear break of a head and shoulder technical formation, clearing the way for 1.4950, the 50% retracement of the same move and trendline support from 1.4080.
USD/JPY retraced overnight losses and rose to a session high of 118.70 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. But tempering those gains today were comments from Japan's FinMin Shiokawa who said he hopes for a slightly weaker yen.// www.forexnews.com