Forex Mid-Day Technical Report

Dollar Tumbles, Yen Rebounds on Renewed Subprime Concerns

Dollar is sold off across the board in US session as worries on subprime mortgages return to be the focus of the markets in a day no key economic data scheduled. US 10-Year Tsy notes slide following the break below 5.0%. Stock markets also tumbled with DJIA falling over 100 pts. Standard & Poor's Ratings Services lowered its ratings on 93 tranches from 75 US synthetic collateralized debt obligations (CDOs) of asset-backed securities, following a review of CDO transactions with exposure to US residential mortgage-backed securities. Dollar is sent to new record low against Euro and fresh 26 years low against Sterling. Meanwhile, the Japanese rebounds stronger across the board on risk aversion and carry trade unwinding.

EUR/USD

Daily Pivots: (S1) 1.3762; (P) 1.3783; (R1) 1.3807; More

EUR/USD break marginally above prior high of 1.3833 on broad based dollar weakness in early US session. Recent rally from 1.3262 has possibly resumed. However, upside momentum remains convincing. As discussed before, sustained trading above 1.3833 is still needed to confirm the underlying momentum. On the other hand, the failure to take out 1.3833 decisively and a break of 1.3778 support will indicate a short term top is formed with bearish divergence condition in 4 hours MACD and RSI.

In the bigger picture, the current development is dampening the original view that rise from 1.3262 is the last advance in a five wave structure that started at 1.2483. Firstly, the current momentum of the rise from 1.3262 is seen stronger than the prior rally from 1.2865 to 1.3681. Secondly, the falling trend line in both daily MACD and RSI were broken, negating the bearish divergence conditions. In other words, the underlying bullishness in EUR/USD could be much stronger than we originally thought.

Focus remains on 1.3822 resistance. Sustained trading above this level will add much weight to the case that whole medium term rally from 1.1639 is indeed resumption of multi-year up trend from 0.8223 (00 low). That is, further rise should be seen in medium term towards 95 high of 1.4523 with much chance to extend further to 61.8% projection of 0.8223 to 1.3668 from 1.1639 at 1.5004.

On the downside, focus will be on 1.3481 cluster support (61.8% retracement of 1.3262 to 1.3833 at 1.3480). As long as this support holds, the fall from 1.3833 will still be treated as correction to rally from 1.3262 only and another rise is still in favor after completion. However, break will put 1.3262 low into focus. And break will indicate that medium term rally from 1.1639 has likely completed after being limited by 1.3822 resistance as originally expected.

GBP/USD

Daily Pivots: (S1) 2.0426; (P) 2.0456; (R1) 2.0498; More

Cable's rally resumes by surging to as high as 2.0586, breaking marginally above mentioned target of 100% projection of 1.9183 to 2.0132 from 1.9621 at 2.0570. At this point, further rally is still in favor as long as 2.0481 support holds. However, a drop below 2.0481 support will indicate that a short term top is possibly formed after meeting the 2.0570 medium term target. In such case, deeper pull back should be seen towards inner rising trend line (now at 2.0306).

In the bigger picture, the sustained break of 2.0207 projection target confirms underlying upside momentum is still strong. Also, it added much credence to the case that whole up trend from 1.7047 is resumption of multi-year up trend from 1.3680. In such case, further rally should then be seen to 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677 first. Sustained trading above this level will encourage further rise to 100% projection at 2.3321.

Meanwhile, even in case of a short term correction, consolidation should be relatively brief as long as 2.0056 support holds and rally should resumes sooner after later after completion. But a break below 2.0056 will indicates a medium term top is possibly formed and bring deeper decline to medium term rising trend line (now at 1.9803).

USD/CHF

Daily Pivots: (S1) 1.1957; (P) 1.1995; (R1) 1.2023; More.

USD/CHF's recovery was limited by 4 hours 55 EMA and the inner falling trend line. Sharp decline in US session suggest that such recovery from 1.1960 has possibly completed. Break of 1.1987 minor support flips intraday bias to the downside for a retest of 1.1960 low. But still, firm break is needed to confirm recent decline has resumed. Otherwise, with bullish convergence condition in 4 hours MACD and RSI, further consolidation is still in favor. Above 1.2066 will encourage further rebound towards 61.8% retracement of 1.2232 to 1.1960 at 1.2128.

In the bigger picture, USD/CHF has likely completed a medium term triangle consolidation already, which started at 1.1919 with five waves to 1.2467. Firm break of 1.1960 low again will confirm this case. 1.1878 (06 low) will be the initial target. And since, in such case, fall from 1.2467 is viewed as resumption of medium term down trend from 1.3283, further weakness should be seen to 100% projection of 1.3283 to 1.1919 from 1.2768 at 1.1404, with much chance to extend to retest 1.1288 (04 low).

On the upside, break of 1.2232 resistance will mess up the short term picture a little bit. In such case, chance is swung to the case that the triangle consolidation indeed started at 1.1878. In other words, the overall outlook didn't change and just that another rally should be seen before completion. Hence, even in such case, upside should be limited below 1.2467 high and bring another medium term decline.

USD/JPY

Daily Pivots: (S1) 121.54; (P) 121.77; (R1) 121.97; More

USD/JPY's sharp decline in US session and the break of 121.54 support indicates that correction from 124.13 is still in force and further decline is now in favor too 120.76 cluster support (38.2% retracement of 115.13 to 124.13 at 120.70) and lower. On the upside, above 122.40 is needed to indicate fall from 124.13 has completed. Otherwise, risk remains on the downside.

In the bigger picture, rise from 115.13 has made a top at 124.13 and turned into consolidation since then. But still, rally from 108.99, which is treated as resumption of whole up trend from 101.66, is still in progress. Even in case of a deeper correction, downside is expected to be contained by 118.35/57 cluster support zone (38.2% retracement of 108.99 to 124.13 at 118.35 and 61.8% retracement of 115.13 to 124.13 at 118.57) and bring rally resumption. Next medium term upside target will be resistance zone of 100% projection of 101.65 to 121.38 from 108.99 at 128.72 and 100% projection of 108.99 to 122.17 from 115.13 at 128.31. However, break of 118.35/57 cluster support argue that rise from 108.99 has possibly completed and put 115.13 low into focus.

EUR/JPY

Daily Pivots: (S1) 167.71; (P) 168.06; (R1) 168.43; More

EUR/JPY falls sharply in US session. Break of 168.09 support and short term rising trend line confirms that a short term top is already in place at 168.93, with bearish divergence conditions in 4 hours MACD and RSI. Deeper decline is now expected to be seen towards 166.49 support first. Meanwhile, on the upside, above 168.86 is needed to turn focus back to the upside.

In the bigger picture, whole medium term rally from 130.60 is still in progress and the interpretation remains unchanged. First wave up ended at 143.60, subsequent correction ended at 137.167. The third wave up ended at 159.63 while fourth wave correction has ended at 150.75. Rise from there represents the final advance in this structure. With 61.8% projection of 137.16 to 159.63 from 150.75 at 164.64 taken out decisively, next medium term upside target will be 100% projection of 137.16 to 159.63 from 150.75 at 173.22.

However, break of the short term rising trend line support (now at 165.63) will dampen this view and indicate that the rise from 150.75 has possibly completed earlier then we thought.In such case, deeper decline should be seen to test 161.49 low first.

Forex News Digest

Treasury 10-Year Note Yield Falls Below 5 Percent on S&P's Cut in Ratings

Dollar Set for Sixth Straight Weekly Drop Versus Euro on Subprime Concern

Yuan Falls on Speculation Central Bank Sold Before Raising Interest Rates

Canada's Dollar Heads for Fifth Weekly Increase as Crude Oil Prices Climb

Pound Heads for Sixth Weekly Gain After GDP Report Stokes Rate Expectation

New Zealand Dollar Rises to 22-Year High, Makes Fifth Weekly Gain on Rates

Yen Declines as Company Profit Outlook, Equities Spur Carry Trades
Fri, 20 Jul 2007 12:17:00 GMT from Bloomberg

Yen remains pressured despite China rate hike boost
Fri, 20 Jul 2007 11:56:00 GMT from Reuters

ECB's Constancio Says Euro Gains Curb Inflation, Central Bank Monitoring
Fri, 20 Jul 2007 11:41:00 GMT from Bloomberg

More Forex News

Economic Indicators Update

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