Daily Report: Dollar Pressing Trend Line Support, Reversal or Penetration?

Risk rally is still the major driving force in the forex markets with dollar and yen generally under pressure. European stocks open mildly higher following broad based rally in Asian equities while crude oil is also firm above 75 level. On the other hand, dollar index is soft below 84 level and continues to dip lower. We'd like to point out again that European majors lagged behind commodity currencies. EUR/USD has been losing momentum since Wednesday while GBP/USD engaged in range trading. Both pairs are close to key trend line resistance and we might see a reversal soon.

IMF acknowledged that US recovery was becoming "increasingly well established even though there were still downside risks. The policy response from US government and Fed were hailed as "powerful and effective". Nevertheless, IMF also urged US to make a stronger effort to cut its budget deficits. IMF projected that under current government policies, deficit will grow to 95% of GDP by 2020 and 135% of GDP by 2030.

On the data front, main focus in European session will be on UK trade balance and PPI. UK visible trade deficit is expected to narrow slightly to GBP -7.1b in May. PPI input is expected to drop -0.4% mom in June while PPI output is expected to rise 0.1%. Core PPI is expected to climb to 5.1% yoy. Canadian data will dominate in US session. Employment report is expected to show 20k expansion in June with unemployment rate unchanged at 8.1%. Housing starts are expected to rise slightly to 193k in June. US wholesale inventories are expected to rise 0.4% in May.

Canadian dollar clearly underperform Aussie in recent risk rally, as seen in the development in AUD/CAD. The corrective fall from 0.9912 might have completed at 0.8576 already. Rise from there is expected to extend to have a test on trend line resistance at 0.9273. A surprisingly strong Canadian job report is needed to change the relatively sentiments on Aussie and Canadian. Otherwise, we'll stay bullish in the cross.

Dollar index is now pressing medium term trend line support at 83.77. Downside momentum is clearly diminishing and as discussed before, we'd expect strong support from 38.2% retracement of 74.19 to 88.70 at 83.15 to conclude the correction from 88.7 and bring up trend resumption finally. Hence, focus will now be on reversal signal. Break of 84.82 will flip intraday bias back to the upside. Further break of 86.42 will confirm that correction from 88.70 has completed and will bring retest of this high. However, note that decisive break of 83.15 fibo level will depend our view and argue that whole medium term rise from 74.19 might be over.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.2640; (P) 1.2676 (R1) 1.2731; More.

EUR/USD edges higher to 1.2721 today but is containing to lose upside momentum. As noted before, we'd expect strong resistance at medium term falling trend line (now at 1.2730) to conclude the corrective rise from 1.1875 and bring reversal. Below 1.2479 minor support will flip intraday bias back to the downside. Further break of 1.2149 support will indicate that recovery from 1.1875 is finished and will target a retest on 1.1875 low. However, note that sustained trading above the trend line resistance will dampen our view and pave the way for stronger rally to next key resistance at 1.3266.

In the bigger picture, fall from 1.5143 is part of the whole down trend from 2008 high of 1.6039. Such decline is expected to develop into a five wave sequence and target 100% projection of 1.6039 to 1.2329 from 1.5143 at 1.1433. We'd expect the current rebound from 1.1875, which is viewed as the fourth wave inside the five wave sequence from 1.5143, to be limited by trend line resistance (now at 1.2730) and bring one more fall. Nevertheless, sustained trading above the trend line will be the first alert that EUR/USD has bottomed earlier than we thought and will turn focus to 1.3266/3691 resistance zone.

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