Mid-Day Report: Euro and Yen Selling Dominates the Markets

While some's focus may be on dollar's rally today, it should be Euro's weakness that should be paid most attention to. As mentioned before, Euro's rally in Dec was fueled by speculation that ECB will pause rate cutting in Jan but markets are getting increasingly doubtful on this. More Euro long positions are closed after ECB Vice-President Papademo's comment that deflation is becoming a convern and ECB will "do what is necessary, in terms of the timing and in terms of the size (of interest rate policy action) to ensure that price stability is preserved." There is also continuous profit taking ahead of tomorrow's flash HICP release from Eurozone.

Euro's selling in crosses, including against EUR/GBP, EUR/AUD, EUR/CAD is indeed pushing theses currencies slightly higher against the greenback. On the other hand, yen's broad based weakness is also helping those higher yield currencies on improved risk appetite. Dollar is also supported by news that US President-elect Obama's fiscal stimulus package will help US recover quickly from recession.

Nevertheless, the weakness in Euro and Yen alone are enough to send the dollar index higher to as high as 83.16 so far, touching mentioned 83.11 cluster resistance (50% retracement of 88.46 to 77.69 at 83.07) as expected. The development so far is consistent to our view that sharp fall from 88.46 is merely a three wave correction and has completed at 77.69. Sustained break of 83.11 will add more credence to this case and pave the wave to retest 88.46 high. Meanwhile, below 81.38 minor support will turn intraday outlook neutral first.

Data released today saw US construction spending dropping -0.6% in Nov, better than expected -1.3%. Eurozone Sentix Investor confidence in January recovered to -34.4( consensus: -44)from a record low of -42.3 in December, after ECB's interest rate cut as well as the government's stimulus plans. In the UK, construction PMI in December plummeted to 29.3 (consensus: 30.5, November: 31.8), the lowest level since the survey started in 1997. Although Switzerland's SVME PMI in December unexpectedly rose to 36.9 from historical low of 35.2 in November, it signaled the 4th month of contraction and indicated the country's industrial activities deteriorated rapidly particularly in the last 2 months of 2008. The improvement in December was brought by the output component while all others recorded decline last month.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3843; (P) 1.3915; (R1) 1.3990; More

EUR/USD's decline from 1.4719 resumed today and dives to as low as 1.3553 so far. Break of mentioned 1.3629 cluster support is consistent with the view that rise from 1.2423 has completed already. At this point, intraday bias remains on the downside as long as 1.3944 minor resistance holds. As discussed before, correction from 1.2329 low is possibly completed too and deeper fall could now be seen to retest this low first. On the upside, above 1.3944 will mix up the short term outlook again and open up the scenario that fall from 1.4719 is corrective in nature.

In the bigger picture, a medium term bottom no doubt in place at 1.2329 and fall from 1.6038 should have completed. Whether such fall is impulsive or corrective in nature is debatable. But after all, in either case, as long as 1.4867 resistance holds, such decline is still in favor to resume. Though, some larger scale consolidation could be seen first. However, above 1.4867 will dampen the bearish view and argue that stronger rally would be seen to retest 1.6038 record high.

Forex News Digest

• Morning Market Recap: U.S. Dollar Rallies, Bonds Sell Off on Stimulus Plan
• U.S. Fixed Income Markets Mixed as Stimulus Package Speculation Runs Rampant
• Euro Has Limited the Impact of Financial Crisis on Monetary Union, Says ECB's Stark
• UK Construction PMI Reaches Series Low of 29.3 in December
• Swiss SVME PMI Rebounds in December
• Monetary, Fiscal Measures Help Strengthen Euro Zone Investor Sentiment in January
• UK's Darling Denies Reports of New State Capital Injections into Banks
• Dollar Rises to Three-Week High Versus Euro on Prospects for U.S. Stimulus
• Dollar Rally Fizzles in Emerging Markets as Fed Awakens Appetite for Risk
• Canada's Dollar Falls as U.S. Currency Rallies Amid Stimulus Plan Optimism
• U.K. Pound Advances Versus Euro on Speculation of Government ABS Guarantee
• Euro to Decline Against Basket of European Currencies, Goldman Sachs Says
• Australian, New Zealand Dollars Climb as Stock Gains Boost Risk Appetite

More Forex News

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