The US dollar continues to remain weak, unusually unaffected by the turmoil emanating out of the Middle East, its role as a safe haven currency being usurped by the Swiss franc and Japanese yen, with the franc hitting record highs against the dollar in Asia.
It would appear that the single currency and sterling are also benefiting from the perception that the Fed will be well behind the curve in any tightening cycle, especially after yesterday’s Bank of England minutes saw Bank of England chief economist Spencer Dale joining Martin Weale and Andrew Sentance in voting for a rate hike, though Andrew Sentance went further in voting for a 50 basis point hike, while Weale and Dale voted for 25 basis points.
This shift in view amongst MPC members is slowly reinforcing market expectations of a rate hike by the middle of this year, and possibly by as early as May, especially given that rising oil prices will continue to underpin inflationary pressures in the UK, as well as across Europe.
These inflationary pressures have also seen the euro benefit ahead of next weeks ECB meeting after further hawkish comments from ECB members Yves Mersch yesterday, while Trichet did nothing to dispel this hawkish view in comments to reporters yesterday.
However if the ECB needed any reminder of the dangers of such action in raising rates on the periphery countries, then yesterday’s unrest in Greece should have provided it, though for now the unrest is currently not having any great adverse impact on the single currency.
The US dollar remained unmoved by comments from FOMC member Charles Plosser’s comments that QE2 could be wound back if the economy continued to improve. Today’s economic data is likely to show that Germany continues to recover with its GDP figures expected to show quarterly growth of 0.4% with a year on year 4% increase. US durable goods for January are expected to show an increase of 3% from December’s negative number of 2.3%. US weekly jobless are expected to show a rise of 405k, down from last weeks 410k and new home sales set to disappoint to the tune of -8.8%, highlighting the still dire state of the US housing market.
EURUSD– the single currency pulled back beyond the right shoulder peaks at 1.3750 and also spilled over above the trend line resistance from the 1.4280 highs at 1.3770 to 1.3785. It hasn’t, as yet managed a daily close above it this level but could be set for a deeper move towards the trend line resistance coming in at 1.3985 from the 2009 peaks at 1.5145. To open up the downside again the euro needs a break back below the 100 day MA around the 1.3540 level to re-target a move towards 1.3200 via 1.3410.
GBPUSD– the pound rallied back towards the November highs at 1.6300, as well as the trend line resistance also at 1.6280 from the 2007 highs at 2.1160. It has as yet failed to overcome this key resistance. A break above 1.6300 targets the 2010 highs at 1.6460. A break below the 1.6080 support is need to target 1.5980. A close below 1.6000 is needed to target a move towards 1.5920 which is 38.2% retracement of the up move from the 1.5350 lows to the 1.6280 highs, followed by 1.5820.
EURGBP– it seems that the move lower we are looking for in the euro is not going to be as straightforward as anticipated, spilling over to just below the 0.8500 area yesterday. This months highs at 0.8520 look set to be the next target yet I can’t help feel that this move is overdone, despite breaking above trend line resistance from the highs at 0.8670. A move back below 0.8450 is needed to target 0.8400/10, on the way back to retarget last week’s lows and the trend line support, now at 0.8350.
USDJPY– sinking US bond yields continue to push dollar yen lower falling below the 3.5% level and setting up a move towards the major trend line support around 81.55 from the 80.25 lows. The US dollar needs to push back above the 83.20/30 area to re-target a move back towards the range highs, but more importantly than that US bond yields need to recover back above 3.5%, being as they seem to be at the moment, the primary drivers behind the falls in dollar yen. It would appear that as previously we may have to wait for the move towards the 84.40/50 area and December 2010 highs.