EUR/USD
More weakness is expected towards 1.4456 and last Friday's low at 1.4436, after Monday's doji candle neutralised the short-term uptrend. The sharp setback off Tuesday's Asian session high at 1.4553 protects Monday's 1.4580 high, and a break below 1.4456 would leave the 1.4580 high as a potential near-term bull failure, exposing downside risk to the 1.4408 area. A 1.618 Fibonacci extension target lies just above 1.4408. Regaining ground above 1.4492 would provide temporary respite, but only keeping 1.4456 intact, combined with a break above 1.4553, would open the range high at 1.4580 once more.
GBP/USD
The setback off 1.6139 is eyeing a return to the intraday bull pennant low at 1.5987. The corrective rally to 1.6139 has fallen significantly shy of the 1.6192 upside target, and further weakness below 1.5987 would leave the late June reaction lows at 1.5911 vulnerable. A recovery above 1.6092 would provide respite, but only above 1.6139 would negate the bearish GBP outlook.
USD/JPY
The recent highs at 81.15 and 81.27 are likely to come under threat, following the strong recovery off 80.54. A USD bull wave towards the 82.00 level is expected this week, as the action is part of a nine-week bear pennant continuation pattern. Resistance at 81.50 needs to be surpassed in order to open the 82.00 target. Corrective USD weakness is limited to the 80.85 area, and only below 80.54 would negate the bullish outlook.
AUD/USD
Corrects lower towards 1.0615, as weakness off the July 1 high at 1.0791 extends. However, with the 50% Fibonacci retracement level of the 1.0391/1.0791 rally providing backup support at 1.0591, corrective downside risk is limited. A recovery above 1.0710 is required to lift the tone, and threaten further gains towards 1.0749 and the 1.0791 high.
FOREX FOCUS
There is now little doubt that the European Central Bank will raise its interest rates again at its next meeting Thursday. Taking full advantage of the lull in tensions over Greece, the ECB is widely expected to raise rates by another 25 basis points to 1.50% in an undisguised effort to re-establish its hawkish credentials and prove its independence to markets. However, this could be a move the ECB regrets. Certainly, by still pouring liquidity into euro-zone banks, the ECB is effectively ensuring that they won't be afflicted by the rise in its repo rate. On that score at least, some economists reckon that higher rates at this stage won't be that damaging. However, there is growing evidence that a rate rise will come just as euro-zone growth slows, inflation pressures subside and, instead of falling, tensions over Greece start to rise again. For some time now, the debt problems of the currency bloc's peripheral members have been seen as a potential threat to the strong growth in core euro-zone countries. The latest measures of manufacturing activity have largely proved this, with new orders slowing and even prices easing back. On Monday, data showed that producer prices in the region fell for the first time in 20 months in May, reflecting the overall decline in global commodity prices that has taken place in recent weeks. Higher food and energy prices, which may have justified the ECB's hawkishness a few months ago, are now in a major retreat as global demand fails to live up to expectations. Although Simon Derrick, a senior strategist at Bank of New York Mellon, steps back from suggesting that we face a similar collapse to 2008, he does point to the 35% fall in wheat prices since their peak in February; the 21% decline in the price of corn futures from its recent high; a 30% fall in the price of silver since the start of May and the collapse in the Baltic Dry Index [which is a measure of trade activity] to half the level it reached last September. In other words, the ECB will be raising interest rates just when the market no longer needs them.
EUROPE
The dollar was broadly higher and the Swiss franc gained during European hours Tuesday as overnight fears about China's latent credit risks continued to reverberate and as euro-zone economic data disappointed. The pound was also a climber after surprisingly positive service-sector data. After the Greece-inspired relief rally, investors pared risky bets and flocked to safe-haven currencies such as the Swiss franc and, to a lesser extent, the dollar. Overnight, Moody's Investors Service said a Chinese government agency may have understated banks' loans to local governments by RMB3.5 trillion ($540.7 billion), warning that the scale of such loans could pose a threat to China's banking system. Euro-zone data failed to cheer traders with activity in the euro zone's private sector posting its weakest growth in more than a year and a half. Meanwhile, retail sales in the 17-country currency bloc slumped in May, likely reflecting a squeeze on real incomes and fears of unemployment. Another interest rate rise from the European Central Bank on Thursday is nonetheless still expected, which helped to steady the euro. That, as well as continued recycling of dollar reserves by Asian central banks continues to underpin the single currency. It was a slightly different story with sterling. A string of weak data and reports of mounting job losses and retailer closures has weighed on the pound in recent weeks so a small positive surprise in the June services purchasing managers' index caught traders unawares. The pound shot up against both the euro and the dollar as traders reversed negative bets. Sterling rose to as high as $1.6128 against the dollar while the euro slipped back below GBP0.90 against the pound.
ASIA
The dollar gained against the euro and the yen in Asia Tuesday as concerns about a possible Chinese interest rate hike reduced investor risk appetite, while expectations that U.S. multinational firms may bring their overseas profits home added to the dollar's strength. The People's Bank of China said in a statement Monday that inflationary pressures "are still high" while the economy continues to grow at a steady and relatively fast pace. On Tuesday, two local papers interpreted the PBOC's statement to mean that a hike in interest rates could be imminent. A Moody's Investors Service report on Monday said that Chinese banks may be facing bigger problems with municipal loans. This news also put downward pressure on the euro. "The currency market was overly optimistic last week and a correction is now taking place after these reports," said Kuniyuki Hirai, a manager at the foreign exchange trading department at Bank of Tokyo-Mitsubishi UFJ. A fall in Tokyo and Shanghai stock prices also made traders wary of buying the euro, he added. A Bloomberg report that a corporate tax holiday on foreign profits being debated by Congress may help strengthen the dollar, traders said. Firms may use a proposed reduction in tax on repatriated profits to bring back as much as $700 billion to create jobs and spur investment, Bloomberg cited a study by the Congressional Joint Committee on Taxation as saying. "It may be used as a trump card for Obama administration ahead of the U.S. Presidential vote next year. And if it is implemented, this could mark an end to a weak dollar policy in the U.S.," says Yuji Saito, foreign exchange market director at Credit Agricole in Tokyo.
WORLD
The U.S. dollar was modestly lower in holiday-thinned trade Monday as the euro brushed aside concerns triggered by Standard & Poor's warning on Greece's debt. Standard & Poor's warning that a debt rollover plan for Greece would be akin to a default rattled markets and negated the positive momentum seen after euro-zone ministers approved funding for Greece this past weekend. Late Monday, the euro was at $1.4541 from $1.4528 late Friday, according to EBS via CQG. The dollar was at Y80.77 from Y80.86, while the euro was at Y117.47 from Y117.45. The U.K. pound was at $1.6090 from $1.6067. The dollar was unchanged at CHF0.8475. The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 74.254 from about 74.298. "There's been very little movement today. I wouldn't expect the euro to fall too far with the possibility of an ECB rate hike later in the week," said Shaun Osborne, chief FX strategist at TD Securities in Toronto. European Central Bank President Jean-Claude Trichet had said the bank was "strongly vigilant" on inflation, which many see as the ECB's willingness to increase rates even in the midst of a debt crisis. "We'll look at the ECB's language surrounding the decision," Osborne said. The tone of the market was broadly more positive toward risky assets, but some market participants said the swing of optimism last week that was sparked by Greece's agreement to austerity measures likely will fade away, with the markets more likely to look intently at economic data coming out of China and the U.S. this week.
