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Daily Report: Dollar Stabilizes But Vulnerable ahead of Manufacturing Data Print E-mail
Market Overview | Written by | Jul 02 12 05:01 GMT

Daily Report: Dollar Stabilizes But Vulnerable ahead of Manufacturing Data

Dollar and yen recover mildly as the week starts but strength is very weak. Markets are calming down from the boost from EU summit. But sentiments are still positive, in particular with expectation of more central bank easing to be announced later this week. BoE is expected to expand its asset purchase target by another GBP 50b while ECB is expected to cut rates by 25bps. While some said that ECB rate cut could be euro negative, we'd like to point out that the risk sentiments lifted by a cut from ECB, and overall market development, would be even more dollar and yen negative. That is, Euro should remain firm against dollar and yen in near term. As for today, a number of important economic data will be released, including PMI data from Swiss, Eurozone, UK and US. The UK manufacturing PMI will be important in determining the direction in EUR/GBP, which has been quite directionless recently. The US ISM manufacturing will have an impact on equities and commodity currencies.

The quarterly Tankan survey from Japan showed that large companies in the countries were less pessimistic about the conditions. Q2 large manufacturers unexpectedly improved from -4 to -1 while non-manufacturing index rose more than expected from 5 to 8. Large manufacturers and non-manufacturers are expected to raise capex by 6.2% this year, exceeding market expectations. Outlook was also positive with large manufacturers expecting 10.1% rise in profit, comparing to 0.6% in March survey. Non-manufacturers expect profits to shrink -1.8%, comparing to -2.3% in March survey. The data should ease some pressure from BoJ for imminent expansion on its easing program. Nonetheless, the manufacturing index is still in negative territory. There were concerns that further slowdown in Europe and China will continue to weigh on the manufacturing and export sectors of Japan. And while BoJ would continue to wait-and-see, adding stimulus is still the next step, also considering the stubborn strength in yen.

Released over the weekend, China's official PMI manufacturing dropped slightly from 50.4 to 50.2 in June, but was above expectation of 49.9. While that's the lowest figure in seven months, staying in expansionary region above 50 is psychologically helpful in easing worry of hard landing in China. Nonetheless, note that new export orders dropped sharply by -2.9 pts to 47.5 while new orders dropped to 49.2, both were in contraction. Separately, the HSBC manufacturing PMI was revised slightly up to 48.2. After all, the more important figure will be next week's Q2 GDP which should reflect more accurately how China's economy was hurt by the ongoing debt crisis in Europe.

SNB President Jordan reiterate and reaffirmed the central's stance to keeping the 1.2 floor in EUR/CHF. Jordan said that "as long as the enforcement of the minimum exchange rate remains the right monetary policy, we will pursue it with utmost determination". And SNB needs to "prevent a deflationary development". Jordan said that Swiss Franc is "still a very highly valued currency". And even though the balance sheet will expand as a consequence, SNB will have to "accept related risks" and bear.

While Spain won Euro 2012 by beating Italy 4-0, Spanish economy minister de Guindos warned yesterday that the country's economy will shrank further in Q2. And the government will continue to push structural reforms and austerities ahead. De Guindos said that the EU summit was a victory for the Euro and "from now on, we must all contribute". ECB executive board member Asmussen said that Greece must meet the austerity and reform targets by 100% to stay in Euro. Asmussen said Greece won't get more time to comply with the targets as "that means that the other 16 eurozone states and the IMF would then have to provide more financing." But all will have to be discussed and confirmed as troika arrives in Athens today to review the Greece's finances with the new government.

EUR/GBP Daily Outlook

Daily Pivots: (S1) 0.8010; (P) 0.8052; (R1) 0.8097; More.

As noted before, consolidation pattern from 0.7949 is still in progress and more sideway trading could be seen in EUR/GBP. Current recovery from 0.7983 might extend higher but after all, rebound attempt should be limited by 38.2% retracement of 0.8505 to 0.7949 at 0.8161. An eventual downside breakout is still anticipated and below 0.7949 will target next important fibonacci level at 0.7782.

In the bigger picture, price actions from 0.9799 are treated as a long term consolidation pattern with fall from 0.9083 as the third leg. Strong support is expected inside 0.7693/8186 support zone to conclude the consolidation. Thus, we'll be looking at reversal signal now. Though, as long as 0.8221 support turned resistance holds, another decline is still in favor, possibly to 61.8% retracement of 0.6535 to 0.9799 at 0.7782 before fall from 0.9083 completes. On the other hand, break of 0.8221 will indicate reversal and EURGBP could then have started another leg inside the consolidation pattern, or resumed the larger up trend.

EUR/GBP 4 Hours Chart

EUR/GBP Daily Chart

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised
23:50 JPY Tankan Large Manufacturers Index Q2 -1 -4 -4
23:50 JPY Tankan Non-Manufacturing Index Q2 8 7 5
0:30 AUD TD Securities Inflation M/M Jun -0.20% 0.00%
2:30 CNY HSBC Manufacturing PMI Jun F 48.2 48.4
7:15 CHF Retail Sales (Real) Y/Y May 0.90% 0.10%
7:30 CHF SVME-PMI Jun 45 45.4
8:00 EUR Eurozone PMI Manufacturing Jun F 44.8 44.8
8:30 GBP PMI Manufacturing Jun 46.5 45.9
9:00 EUR Eurozone Unemployment Rate May 11.10% 11.00%
14:00 USD ISM Manufacturing Jun 52 53.5
14:00 USD ISM Prices Paid Jun 46 47.5
14:00 USD Construction Spending M/M May 0.20% 0.30%

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