Mid-Day Report: EUR/USD Steady after ECB

ECB left rates unchanged at 4.25% as widely expected. In press conference, Trichet once again tried to sound hawkish, noting that upside risks to price stability had been confirmed by recent data and stressing the need to avoid broad-based second-round effects. Regarding growth, Trichet said that down risks to growth prevail and Eurozone is undergoing an "episode of weak activity." In the the Q&A session, Trichet said that ECB has no bias at the moment. Staff projections for 2008 GDP growth was lowered from 1.5-2.1% to 1.1-1.7% and that of 2009 was changed from 1.0-2.0% to 1.6-1.8%. Inflation forecasts was revised from 3.2-3.6% to 3.4-3.6% in 2008 and 1.8-3.0% to 2.3-2.9% in 2009.

BoE left rates unchanged at 5.0% as widely expected. No statement was issued and focus will turn to minutes to be published on Sep 17. Data from US saw ADP employment dropped -33k in Aug versus expectation of -30k. Jobless claims jumped to 444k. Q2 labor cost was revised down to -0.5% while productivity was up to 4.3%. Data released in European session saw UK Halifax house price dropped more by -10.9% yoy in Aug. Germany Factory orders dropped -1.7% mom, -0.7% yoy in Jul. ISM non-manufacturing index, Natural Gas Storage and Crude inventories will be released later in the US session.

After all, Euro remains relatively steady against dollar but some weakness is seen in crosses, in particular in EUR/GBP. The main driver in the US could be the Japanese yen which is lifted by risk aversion on anticipation of a lower open in stock markets, following recovery in oil prices. Markets will probably continue to take profits from long dollar positions ahead of tomorrow's Non-Farm Payroll which could see major currencies recovering further against the greenback.

(Quick update: dollar mildly higher after ISM Services came in at 50.6, above expectation and back above 50. Though, employment component remains sub-50 at 45.4. )

EUR/JPY Mid-Day Outlook

Daily Pivots: (S1) 156.15; (P) 157.09; (R1) 157.93; More.

EUR/JPY remains bounded in tight range above 156.25 in early US session but nevertheless, intraday bias remains on the downside as long as 158.48 minor resistance holds. Further decline is still expected to 149.27/151.71 key medium term support zone. Though, above 158.48 will indicate that an intraday low is in place. Considering mild bullish convergence condition in 4 hours MACD, a short term bottom might be in this case and stronger rebound could be seen towards 162.00 resistance.

In the bigger picture, rise from 151.71 has completed at 169.69 after failing 170 psychological resistance. The case of a long term top continues to build up with bearish divergence conditions in weekly MACD and RSI and with monthly MACD remains below signal line. Focus is now on long term rising channel support (now at 158.87). Sustained break of the channel will indicate that whole long term up trend from 88.97 (00 low) has completed too and bring deeper decline to 149.27 key medium term support for confirmation. On the upside, above 170 psychological resistance is now needed to confirm underlying momentum. Otherwise, downside risks will continue to grow.

Forex News Digest

• Recent Data Confirm Upside Price Stability Risks, Says ECB's Trichet
• ECB Keeps Main Refinancing Rate Unchanged at 4.25%
• U.S. Initial Jobless Claims Rise to 444k
• ADP Report Says 33,000 U.S. Private Jobs Lost in August
• BOE Holds Rates Again as Stagflation Looms
• Overnight News Recap: GE Factory Orders, HBOS House Prices Fall; Riksbank Hikes
• Euro Little Changed Against Dollar After ECB Leaves Interest Rate on Hold
• Australian, New Zealand Currencies Rise as Investors Seek Higher Yields
• Pound Rises Against Dollar, Euro as Bank of England Keeps Rate Unchanged

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