EUR/USD
Corrects lower towards the 1.4105 area, after setting a fresh 20-week high at 1.4249. The bear wave needs to push below 1.4153 in order to expose the 1.618 Fibonacci extension target at 1.4105, but downside risk is limited at this stage. Bulls still remain in control of the short term while 1.4105 holds, and a push above 1.4218 would open the 1.4249 high again. The Nov. 4 reaction high at 1.4283 is the main upside target.
GBP/USD
Tuesday's strength leaves GBP in a good position to extend the recovery through resistance at 1.6401. Tuesday's highest close since December 2009 suggests there is scope for further gains to the January 2010 lower reaction high at 1.6458, and 1.6500. Corrective weakness has scope to the 1.6293 area, and only below there would defer the bullish outlook.
USD/JPY
Volatility has reduced significantly, and the dominant downtrend will look to challenge support at 80.52. Downside projections from Monday's lower high at 81.32 suggest there is room for 80.00 and the significant 79.75 level in the coming sessions. Regaining ground above 81.07 would provide respite, but only above 81.32 would lift the tone.
AUD/USD
Tuesday's high at 1.0130 is under threat as the powerful short-term uptrend looks to extend towards the March 11 high at 1.0160. The key lower high at 1.0203 from March 1 would then come within striking distance, as the recovery off the March 17 reaction low at 0.9705 strengthens. Corrective weakness below 1.0064 would prompt a limited setback towards the 1.0000 level before finding a base.
FOREX FOCUS
The dollar has even fewer friends now than it had before. Events over the past few weeks in Japan and the Middle East may have provided some distraction for financial markets, with currencies being driven more by fear than global economics. But now, as these immediate fears subside, global inflation concerns are returning with a vengeance and the dollar has been found wanting. Not only has the U.S. currency's trade-weighted index tumbled to a 15-month low, with the dollar falling against most other majors, but it is falling to new record lows against some emerging-market currencies, including both the Singapore dollar and the Chinese yuan. The problem for the dollar is this. While global inflation fears have intensified and most other central banks are talking about or raising interest rates, the U.S. Federal Reserve has remained silent. Essentially, investors are looking at the global interest-rate profile and assuming that the U.S. is falling behind the curve. As fears about a nuclear catastrophe in Japan subside, investors are not only looking at the impact the earthquake devastation will have on global growth but also on the impact it will have on the Japanese supply chain and the price of food. This comes at a time when food prices were already on the rise due to grain shortages among many major producers. The attack by U.S., U.K. and French forces on Libya shouldn't have a major direct effect on oil prices. But as political unrest spreads to Syria and Yemen, tensions in the Middle East are likely to remain high, contributing to a continued strong performance by crude oil prices. There are already signs that this is creating unwanted price pressures, with the U.K. reporting Tuesday that its inflation rate rose to 4.4% last month, even more than the 4.3% that was expected. In the euro zone, the European Central Bank has made it pretty clear that it is ready to start raising rates as early as next month, despite all the uncertainties about Libya and Japan, and even the continuing threat of a sovereign-debt crisis among its peripheral members now that details of a longer-term European Stability Mechanism have been negotiated.
EUROPE
The pound lost its footing above $1.63 against the dollar Wednesday in European trading after the minutes of the Bank of England's meeting earlier this month disappointed market expectations by failing to ramp up the aggressive tone on rising inflation. The central bank's tone was a little more tentative, as it signalled a wait-and-see approach given the uncertainties for economic growth and the forces driving inflation. That led some investors to scale back expectations that the BOE will lift interest rates soon, and in turn weighed on the pound. News of spiralling inflation, with the key annual inflation rate hitting its highest level since October 2008 in data released Tuesday, had triggered fresh support for the pound, taking it close to $1.64 against the dollar "The problem is that the Monetary Policy Committee is driven not by inflation in itself, but by what the inflation means," said Daragh Maher, currency strategist at Credit Agricole. This would mean the central bank is on the watch for knock-on effects from increases in headline inflation, particularly wages, rather than just responding to rising price trends. That said, the central bank warned that the headline annual inflation rate may well top 5% in the coming months. It tempered that assessment by saying that it will learn more about the forces driving inflation over the coming months and that it remains too early to gauge the strength of economic recovery in the U.K.
ASIA
The yen strengthened slightly against the dollar and euro in Asia Wednesday as the broadening fallout from Japan's nuclear reactor crisis weighed on share prices, increasing demand for the country's low-yielding unit, considered a safe-haven. But dealers said sharper rises would continued to be limited by expectations that any such gains could prompt Japan's Ministry of Finance to order intervention to curb the currency. The dollar would likely hold in a relatively narrow band around Y81.00 for the rest of the global day, dealers said, as investors hesitate to make major bets amid the continued uncertainty over the situation in Japan as well as the military operations in Libya. The Tokyo Metropolitan Government said Wednesday that radioactive iodine exceeding permissible levels for infants has been detected in tap water in Tokyo, adding to concerns over the broadening scope of contamination from the earthquake and tsunami-stricken Fukushima Daiichi reactors about 150 miles north of the capital. "People want to see how things go with the nuclear reactors, and there is also the uncertainty with the geopolitical situation in northern Africa and the Middle East," said Shuichi Kanehira, a senior foreign exchange dealer at Mizuho Corporate Bank.
WORLD
Tuesday in New York the U.K. pound hit its strongest level against the dollar since January 2010 after rising inflation in that country led investors to bet that the Bank of England would soon be forced to increase key rates. The euro also pushed farther above the psychologically key $1.42 level to its highest since November, as tough-on-inflation comments from the region's central bankers also hinted at an impending rate rise. Both left the dollar sidelined, as the easy-money Federal Reserve is increasingly seen as likely to lag other major central banks that are mapping their way to normalizing monetary policy, while the Fed continues down the road of ultralow rates and large-scale asset purchases. "If you look at the major central banks of the world, the ECB [European Central Bank] has signaled that it's about to tighten imminently," said Constantine Ponticos, managing director of investment management research in London for Pareto, which manages more than $50 billion in currencies. "The BOE is, I would say, in the eyes of the market losing credibility unless it signals a hike," Ponticos said. Some members of the Fed, meanwhile, are signaling that they are becoming less comfortable with policy meant to prop a U.S. economy whose recovery may no longer need the stimulus of loose policy, "although they haven't signaled any imminent" moves to tighten, he said
