Mid-Day Report: Dollar Resumes Rally after Poor Retail Sales

Dollar regains strength in early US session after the release of poorer than expected retail sales. Headline sales in US dropped for the 6th consecutive months by -2.7% mom in Dec, much worse than consensus of -1.2%. Ex-auto sales dropped by -3.1% mom, also much worse than expectation of -1.3%, worst since record began in 1992. Following weakness in European stocks, US markets are set to open lower. As risk aversion remains the driving force in the currency markets, dollar and yen are sent higher following the data. Also released from US, export price dropped -2.3% mom in Dec versus expectation of -2.0% while import price dropped -4.2% mom versus expectation of -5.3%.

Released earlier, Germany Dec GDP rose 1.3% yoy, lower than market expectation of 1.4% and November's 2.5%. Eurozone's industrial production contracted for the 7th consecutive month by 1.6% mom in November (consensus: -1.8%, October: revised to -1.6% from -1.2%), due to decline in output of consumer durables and intermediate goods. On annual basis, the reading plunged 7.7% from the revised -5.7% in October. Japan's machine tool orders dropped 71.9% yoy in December after falling 62.1% in November. Domestic and external orders plunged 74% and 70.3% respectively.

Technically, Dollar's rally resumes by taking out 84.45 and reaches as high as 84.62 so far. Intraday bias remains on the upside as long as 83.44 minor support holds. Current rally from 77.69 is expected to head to retest 88.46 high. Below 83.44 will turn intraday outlook neutral first but short term outlook will remain bullish as long as 81.19 support holds.

Euro continues to show sign of weakness in general. EUR/CHF's fall continues and dive further to as low as 1.4685. Intraday bias remains on the downside as long as 1.4841 minor resistance holds and the current decline from 1.5880 is expected to extend to key long term support at 1.4315. EUR/GBP's recovery from 0.8838 lost steam ahead of 4 hours 5 EMA and mentioned 0.9174 resistance. Short term outlook remains bearish. Below 0.8838 will indicate that fall from 0.9799 has resumed Decisive break of rising trend line support will confirm that rise from 0.7808 has completed and will bring deeper decline to 0.9234 support next.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3088; (P) 1.3231; (R1) 1.3322; More

EUR/USD's fall resumes after brief recovery and dives to as low as 1.3096 in early US session. At this point, intraday bias remains on the downside as long as 1.3343 minor resistance holds. As discussed before, consolidation from 1.2329 has possibly completed at 1.4719 already. Further decline should be seen to 1.2549 support first then retest 1.2329 low. On the upside, above 1.3343 will turn intraday outlook neutral first. But break of 1.3796 resistance is needed to indicate that fall from 1.4719 has completed. Otherwise, short term outlook remains bearish.

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 and should target 1.1639 medium term support next. 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

• Bank of Thailand Lowers Policy Rate to 2.0%
• ECB Has Room to Cut Further in Coming Months, Says OECD
• European Market Recap: European Bonds Fall, Equities Lower
• Euro Zone Industrial Output Falls 1.6% Monthly, 7.7% Year-Over-Year in November
• UK Government to Secure up to £20 Billion in Short-Term Loans for Small Business
• German GDP Growth Slows to 1.3% in 2008, Budget Deficit Falls to 0.1% of GDP
• Treasuries Poised to Fall, Dollar to Weaken as U.S. Increases Debt Sales
• Bank of America Says Euro Is `Excessively' Sold Before ECB Rate Decision
• Top Fed Officials Want New Effort to Cleanse Banks Hobbled by Toxic Assets
• Barclays Says ECB Will Cut Rates as Low as 1.25%, Japanese Yen Will Rise
• Australian, New Zealand Dollars Strengthen as Stocks, Commodities Rebound

More Forex News

Economic Indicators Update

For Crude Oil and Gold analysis, click here

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box