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The dollar soared in London trade after breaking through key technical levels against the European majors and yen. EUR/USD broke below its July 5 low of 97.10 to reach a 6-week low of 96.54. USD/JPY also surged to a 6-week high of 120.98 above its July 2 high of 120.73. Fears that the US economic slowdown will have spillover effects in the rest of the world supports the view that a double dip is not just dollar negative. This has lead to a further paring back of dollar short positions, but real money flow is also likely behind the dollar's renewed strength against the European majors and yen this week.
As investors reassess global growth expectations, the next move in USD will entirely depend on money flows in a period of slower than expected growth. 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. With prices therefore expected to rise, it is not improbable that repatriated money as well as foreign capital flowed into short-dated US Treasury bonds this week, thereby helping the dollar higher. But further flows into the dollar may have to come on the back of a rise in US equities given that Treasuries yields are near last year's lows. With the stock market outlook still uncertain, a further rise in USD also remains uncertain.
However, the technical outlook continues to improve. EUR/USD fell to a 6-week low of 96.54. The break below 97 cents violates a clear head and shoulders pattern, with a top at 1.02. But there is still hope for the euro if it holds above key support at the 95.80/96.00 area. This area happens to mark the intersection of ascending channel support from 85.65, a previous top and the 38% retracement of the entire rally from 85.65 to 1.02. If the euro can form a base here a rebound back above parity is likely. But a break below would signal that the correction has turned into a trend.
USD/JPY soared to a high of 120.98 in London trade after rising on initial concerns over repatriation of overseas funds by US investors to cover losses on Wall Street. The dollar reached its target of 120.80/121.00 and a move above here would likely lead to further buying targeting 122.00, followed by reaction high of 122.75 and 123.00, the 38% retracement of the decline from 135.20 to 115.45. Support is seen at 120.50 followed by 119.80 and 119.50.
Today the FSA announced it would implement new rules against margin based short selling, similar to US 'uptick' rule, effective in September. Nevertheless, the Nikkei fell 2.1% to below 9500 today before closing on that level. This is near 18-year lows around 9420 reached earlier in the year and is seen weakening the balance sheets of large banks and thereby exacerbating the bad loan crisis. Given the renewed weakness in global demand, Japan does not want this issue resurfacing now that slower growth is impacting their export led recovery. Traders say the 9,500 mark would likely see some bargain hunters.
GBP/USD fell to a one-month low of 1.5405, putting it down over 2.5 cents against the dollar since US trade overnight. Sterling is now struggling to maintain above 1.5415, the 62% retracement of the 1.5140 to 1.5865 rally. Below here would increase the bearish tone and target 1.5250 ahead of 1.5140.
USD/CHF also soared to a one month high of 1.5054, just shy of the July 5 high of 1.5080. Resistance is seen at 1.5080 followed by 1.5180/1.5200.