Euro Open: Oil Drop, Georgia Conflict May Extend Dollar Gains

Japanese Corporate Prices reached a 27-year high, while Industrial Production stood at a standstill. Australian Business Confidence remained at 7-year low in July. The US Dollar continued to advance against the Euro and the Pound, taking out near-term support levels. The calendar offers some heavyweight releases in European hours, though traders may pay closer attention to the continued slide in oil prices as well as escalating conflict between Russia and the Caucasian republic of Georgia.

Key Overnight Developments

• Japanese Corporate Prices Reach 27-Year High. Industrial Production at a Standstill
• Australian Business Confidence Remains at 7-Year Low
• US Dollar Continues to Advance Against Euro, Sterling

Critical Levels

The Euro continued downward in Asian trading, passing support at 1.4884 to reach as low 1.4859. DailyFX Chief Strategist Jamie Saettele expects the Euro to decline as low as 1.4668. Near-term support stands at 1.4753, with resistance at 1.5159. Sterling traded lower overnight, bypassing support at 1.9082 to reach a low of 1.9033. Support is now at 1.8952, with resistance at 1.9337.

Asia Session Highlights

The data docket failed to stir the forex markets in overnight trading. In the UK, the RICS House Price Balance declined less than expected in July, printing at -83.9% versus -90.0%. On balance, the improvement is marginal considering the magnitude of the decline in prices. Real estate demand has collapsed as buyers are unable to obtain credit to finance purchases. Indeed, June's Mortgage Approvals dropped to the lowest level since at least 1999.

Japan's Domestic Corporate Goods Price Index printed at a 27-year high, surpassing expectations to register at 7.1% in the year to July. The metric reflects higher energy and raw materials costs faced by Japanese producers. The impact of cheaper crude is likely to be reflected slower in corporate and producer costs than in consumer indices. Prices at the gas pump are more flexible than those faced by firms as they typically try to hedge against significant changes in production costs by locking in prices months in advance. The final revision of Industrial Production saw the metric underperform initial estimates to print at 0.0% in the year to June, showing the Japanese manufacturing sector at a standstill. The release lends credence to forecasts that Japan's heretofore resilient export sector will begin to suffer at the hands of shrinking global demand.

July's Australian NAB Business Confidence matched June's release to print at -9.0, the lowest in seven years. NAB Business Conditions deteriorated to the worst since 2001 as firms weigh up the rapidly slowing economy coupled with persistently high borrowing costs. On balance, the release did not substantively impact priced-in themes already in play for the Australian Dollar.

Euro Session: What to Expect

The calendar offers some heavyweight releases in European hours. France's Current Account deficit will likely widen: markets have already seen the trade portion of the metric as June's Trade Balance dipped lower into negative territory as higher oil prices inflated import volumes while the global slowdown crimped export demand.

July's French Consumer Price Index is expected to see costs moderate on a monthly basis from June's reading as the selloff in crude is factored in. The same dynamic will guide UK Consumer and Retail Prices lower on monthly basis. This would validate our suspicion that consumer prices are more responsive to changes in energy costs than producer indices.

DCLG UK House Prices will likely disappoint. Expectations call for a print at 1.5%, the lowest print since at least 2003. On balance, Britain's housing crisis is a well-established fact at this point and the release is unlikely to create significant volatility for the Pound.

All told, traders may pay closer attention to the continued slide in oil prices as well as escalating conflict between Russia and the Caucasian republic of Georgia. The greenback tends to attract capital at times of geopolitical tension because the US remains the dominant global military power. Crude hit a 5-month low at $112.72.

DailyFX

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