EUR/USD still lingering above support ---Saxo Bank Analysis---

Published: Jul. 01 2005, 13:09 GMT

EUR/USD still lingering above support, while AUD, NZD and JPY continue to suffer under the USD's weight.

EUR may yet join the weaklings vs. the USD later today or early next week. ISM up at 14:00 GMT.

---

MAJOR HEADLINES – PREVIOUS SESSION

• Germany and EuroZone Manufacturing PMI's were marginally better than expected in June
• The South African Investec PMI jumped to 59.8 in June vs. 53.6 in May.
• Germany's Chancellor Schroeder lost a confidence vote in the Germany parliament, which will usher in the holding of new elections in September

Market Action: GBP, NZD, AUD and JPY were weak with the EUR and USD strong in the European Session today.

---

THEMES TO WATCH – UPCOMING SESSION

No new developments today to challenge the view from this morning, though the fall in US EuroDollar 3-month and Treasury futures today in Europe could be indicative of a USD that will strengthen further (even if we have argued that there is littl correlation with rates and currencies lately). It's interesting to see EUR holding up so well as its oversold levels in the crosses would seem largely unwound by now for the short term. The EUR/GBP rally is simply mind-boggling and may need a little consolidation, which is likely if 1.2000 finally gives way in EUR/USD as we expect.

Still, an ISM under 50 could be enough of a shocker to delay or cancel a EURUSD sell-off, though there's no reason to expect the ISM won't be in line with the 51+ expectations. Sio the break lower may yet come today.

The technical comments are partially updated depending on the activity today.

__________________________

(commentary from this morning...)

We got it wrong with the Fed statement. The Fed's complete lack of admission that there are signs of weakness in the economy took us by surprise and is very bullish for the USD here short term as the market is now scratching its head on when the Fed will stop hiking rates. Interestingly, the long treasury market continues to thumb is nose at the Chairman and actually rallied yesterday - and EuroDollar short interest rate futures were unbelievably stable considering what this would supposedly mean for rates further out. Esssentially the market is saying, "Even though you sit there with your finger on the button, Mr. Greenspan, we know you will stop pressing it soon."

The currency market was another matter, as USD bulls found fresh reason in yesterrday's developments (for the short term at least) to put on new positions.

Looking at the anatomy of the statement - the infamous "accommodative" (for current rate level) and "measured" (for pace of hikes going forward) words were retained, while the kicker was this: the Fed interestingly dropped its observation from May 3 that growth had "slowed somewhat" and now states that "Although energy prices have risen further, the expansion remains firm.

The market was clearly caught on the wrong foot here, and with the long weekend approaching, we could see a very large move down in EUR/USD and up in USD/CHF today, barring any desperately bad ISM data at 1400 GMT. This may be the final blow-off rally in the USD before some consolidation further out.

The data from Japan overnight is JPY supportive and USD/JPY's may begin to slow a bit while EUR/JPY looks vulnerable to a reversal lower.

 

---

Note: the support/resistance levels used in the matrix's of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.

Euro/US Dollar     

EURUSD  (1.2081 @ 12:51 GMT)

EUR/USD  held in the range today between 1.2020 and 1.2110 as EUR continued to consolidate stronger in the crosses. LAter today, the pair may not escape the USD's wrath and we could see a quick removal of 1.2020 and a blast lower to 1.1870 early next week if the 1.2110 area holds. 1.2160 is the reversal level if things develop against our expectations.

Resist. 1.2247 1.2169 1.2138 1.2081 1.2059 1.2012 1.1933 Support

British Pound/US Dollar     

GBPUSD  (1.7790 @ 12:56 GMT)

GBP continued lower today against EUR, GBP and the USD. The big 1.7750 level was briefly taken out today in GBP/USD. 1.7880 is now resistance and the pair may even head to 1.7500 in the days ahead, though the momentum may begin to fade.

Resist. 1.8432 1.8198 1.8056 1.7790 1.7822 1.7730 1.7496 Support

US Dollar/Japanese Yen     

USDJPY  (111.14 @ 12:58 GMT)

USD/JPY trended ever higher, though, it may stop soon around the 112.00 area as the things are getting a bit overheated here. A fall toward 110.40 support may be the next move.

Resist. 112.63 111.63 111.28 111.14 110.28 109.64 108.64 Support

www.saxobank.com

More hawkish than expected Fed has USD blasting stronger. EUR may focus on 1.1870. SaxoBank strategies

Published: Jul. 01 2005, 05:53 GMT

More hawkish than expected Fed has USD blasting stronger. EUR may focus on 1.1870.

Today's ISM an event risk, but Fed rhetoric dominates as not gesture was made to recent economic weakness.

---

MAJOR HEADLINES – PREVIOUS SESSION

• US Chicago PMI out at 53.6 vs. 54.0 expected.
• US Weekly Natural Gas Storage with build of 92 vs. 85 expected.
• Japan's Employment data in as expected, but Workers' Household Spending declind –1.4% in May.
• Japan Q2 Tankan Survey in better than expected at 18 vs. 16 and Services Tankan also better than expected at 15 vs. 12
  Australia Retail Sales out at 0.9% vs. 0.4% expected in May
• Australia Building Approvals out at 4.5% in May vs. 0.0% expected.

Market Action: USD much stronger yesterday and atronger overnight vs. JPY and EUR.

---

THEMES TO WATCH – UPCOMING SESSION

We got it wrong with the Fed statement. The Fed's complete lack of admission that there are signs of weakness in the economy took us by surprise and is very bullish for the USD here short term as the market is now scratching its head on when the Fed will stop hiking rates. Interestingly, the long treasury market continues to thumb is nose at the Chairman and actually rallied yesterday - and EuroDollar short interest rate futures were unbelievably stable considering what this would supposedly mean for rates further out. Esssentially the market is saying, "Even though you sit there with your finger on the button, Mr. Greenspan, we know you will stop pressing it soon."

The currency market was another matter, as USD bulls found fresh reason in yesterrday's developments (for the short term at least) to put on new positions.

Looking at the anatomy of the statement - the infamous "accommodative" (for current rate level) and "measured" (for pace of hikes going forward) words were retained, while the kicker was this: the Fed interestingly dropped its observation from May 3 that growth had "slowed somewhat" and now states that "Although energy prices have risen further, the expansion remains firm.

The market was clearly caught on the wrong foot here, and with the long weekend approaching, we could see a very large move down in EUR/USD and up in USD/CHF today, barring any desperately bad ISM data at 1400 GMT. This may be the final blow-off rally in the USD before some consolidation further out.

The data from Japan overnight is JPY supportive and USD/JPY's may begin to slow a bit while EUR/JPY looks vulnerable to a reversal lower.

 

---

Note: the support/resistance levels used in the matrix's of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.

Euro/US Dollar     

EURUSD  (1.2042 @ 05:53 GMT)

EUR/USD  held in the range yesterday as EUR was consolidating impressively in the crosses. Today, the pair may not escape the USD's wrath and we could see a quick removal of 1.2020 and a blast lower to 1.1870 early next week. Resistance comes in at 1.2110 is first resistance and 1.2160 is the reversal level.

Resist. 1.2247 1.2169 1.2138 1.2042 1.2059 1.2012 1.1933 Support

British Pound/US Dollar     

GBPUSD  (1.7834 @ 05:53 GMT)

GBP was blasted into oblivion yestereday as more bad data from the UK suggest that the BOE may soon begin to lower rates. The opposite anticipated trajectories of US and UK rates could see GBP/USD heading lower still, if on slightly slower momentum to the big 1.7750 level, beyond which only 1.75 holds the pair back from the abyss. 1.8000 is the big resistance now, but 1.7880 is first resistance.

Resist. 1.8432 1.8198 1.8056 1.7834 1.7822 1.7730 1.7496 Support

US Dollar/Japanese Yen     

USDJPY  (111.04 @ 05:52 GMT)

USD/JPY looks like it will head higher to the major 112.00 resistance are now as 110.40 now comes in as support. The momentum may slow a bit here as JPY may begin to assert itself in the crosses again.

Resist. 112.63 111.63 111.28 111.04 110.28 109.64 108.64 Support

http://www.saxobank.com

GBP collapses on more bad data. Gunslingers also running stops on JPY longs ahead of the FOMC.

http://www.saxobank.com/?id=582&Lan=EN&Au=1&Grp=5&PubTypeID=1

Will the FOMC provide a snapback from the latest market moves?

---

MAJOR HEADLINES – PREVIOUS SESSION

• Switzerland CPI fell -0.2% vs. expectations of +0.2%
• UK Nationwide House Prices fell -0.2% in June vs. -0.1% expected
• France Consumer Confidence Indicator for June out at -30 vs. -28 expected
• France Unemployment steady at 10.2% in May, while Unemployment rolls ticked up 1K vs. 2K expected
• Germany Unemployment fell to 11.7% from 11.8% in June (11.8% was expected) while the Unemployment rolls dropped -23K vs. 0K expected
• Norway's Unemployment Rate rose to 3.4% in June from 3.3% as expected
• Italy's PPI fell -0.4% in May vs. 0.0% expected
• UK's final GDP reading for Q1 was in at 0.4% vs. the original 0.7% reading and 0.5% expected.
• EuroZone Consumer Confidence was steady at -15 in June as exepcted while Economic Confidence rose marginally and Services Confidence fell a notch.
• UK GfK Consumer Confidence fell to -3 in June from -1 in May and -2 expected.
• South Africa's May Trade Balance was in at -2840M Rand vs. -650M expected
• US Personal Income for May out at 0.2% vs. 0.3% expected while Personal Spending was out at 0.0% vs.0.1% expected
• US Weekly Initial Jobless Claims were out at 310K vs. 325K expected
• Canada GDP for April was out at 0.4% vs. 0.3% expected.
• Canada's Raw Materials Price Index for May out at -3.1% vs. -1.0% expected
• Canada's Industrial Product Price change for May was out at 0.0% vs. 0.1% expected 

Market Action: GBP collapsed vs. the market and JPY was also ver weak today as EUR/USD remained rangebound..

---

THEMES TO WATCH – UPCOMING SESSION

Market sending mixed messages with today's crazy action, as the weak GBP and weak JPY were really the focus. The latter may be a blow-off spike before this evening's FOMC - don't be surprised to see a sudden reversal of direction. Meanwhile, the GBP weakness could be set to continue (especially in the crosses) if more signs crop up that the UK economy is struggling and if further rhetoric from the BOE indicates more likelihood of rate cuts going forward.

The latest uptick in EUR/USD may follow through higher, but we won't know until the FOMC this evening.

No change to the technical comments, as we'd prefer to see how things settle going into tomorrow rather than making a wild stab while the markets are really hot - and they promise to stay that way for the North American session and possibly tomorrow as well as we're headed into a three-day weekend in the US.

_____________________________

(comments from this morning...)

It's tough not to flip-flop on what will unfold today in the wake of the FOMC, but there are really two scenarios that we can boil it down to for now (both of which are 100% sure to include a 25 bps hike in rates - but like expensive perfume, it's the packaging that counts today):

• The Fed leaves its monetary statement entirely unchanged and expresses no worries about the latest softness in some of the data.
  Market reaction: a retest of the USD highs with some possible follow through higher before USD corrects weaker again.
  
• The Fed leaves the monetary policy statemnt largely unchanged, but concedes that numbers have been soft and expresses concern about the numbers, or expresses that continued weakness in the numbers could lead to a change of stance.
  Market reaction: USD weakens almost right away and EUR/USD heads quickly toward 1.2180 resistance and even 1.2300 in the days ahead. This is the scenario we prefer.
  

We don't believe the Fed will nix the infamous "accommodative" word from its monetary statement - but it would be extremely bullish for EUR/USD in the short term if it did.

One important thing to note as we mentioned yesterday, the interest rate correlation with the USD strength/weakness has really faded - in fact the latest research from one of the bigger banks measures it at close to zero, so we shouldn't necessarily expect a rally in yields to interfere with the EUR/USD picture.

We also have the Chicago PMI up today - an especially weak reading there could have the market breathing down the Fed's neck to admit that the economy is looking a bit soft. Of course, tomorrow's ISM number is a better number than the regional manufacturing surveys for measuring the health of the US manufacturing sector. The ISM may bounce a bit in the coming couple of months if companies begin to restock some of their low inventories.

Today offers a really packed calendar. Besides the FOMC meeting and Chicago PMI, we also have France and Germany unemployment figures, UK Consumer Confidence, a Norway rate announcement (a 25 bps hike expected), Canada GDP,  and US Personal Income and Spending.

---

Note: the support/resistance levels used in the matrix's of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.

Euro/US Dollar     

EURUSD  (1.2100 @ 12:44 GMT)

EUR/USD  held above 1.2020 yesterday as fresh shorts were taken out of their positions on the "no-break". As outlined in the overall comments, there are two possibilities here depending on the outcome of the FOMC. A break below 1.2020 that holds could usher in new lows toward 1.1870 before we see a recovery while a continued rally through back through 1.2150/60 could spark a further rally toward the 1.2290 resistance much higher. Nominal support comes in at 1.2060 now.

Resist. 1.2258 1.2162 1.2115 1.2100 1.2019 1.1969 1.1873 Support

British Pound/US Dollar     

GBPUSD  (1.7943 @ 12:44 GMT)

GBP/USD touched the 1.8000 low yesterday on the lousy UK retail sales data and could test that area again today. The risk for a follow through lower is determined by the outcome of the FOMC meeting, but the technical target comes in around 1.7850 on a break. A rise back above 1.8150 resistance again, on the other hand, would suggest that the 1.8000 to 1.8350 range will hold for now and that the pair could pull itself higher toward the top of the range once more in the days ahead.

Resist. 1.8453 1.8266 1.8164 1.7943 1.7977 1.7894 1.7707 Support

US Dollar/Japanese Yen     

USDJPY  (110.69 @ 12:44 GMT)

JPY is struggling to find buyers ahead of the critical Tankan survey in Asia's Thursday session (23:50 GMT tonight), but USD/JPY may have topped out for now with yesterday's 110.62 reading. Now we focus on how the pair holds up during a possible consolidation lower - 109.70 is the first focus as a strong penetration back through that support level would have us smelling a reversal. 110.10 is minor support.

Resist. 112.11 111.19 110.81 110.69 109.89 109.35 108.43 Support