Forex Daily Technical Report

Euro Resumes Rally. BoE, ECB, ADP and ISM Awaited

While Sterling traders are still holding their breath ahead of BoE rate decision, Euro traders led the way by resuming recent rally against dollar in early European session ahead of ECB announcement and press conference. EUR/JPY also broke to new record high of 167.27. Strength is also apparent in EUR/GBP as the cross is now pressing last week's high of 0.6768. Much volatility is anticipated today as in addition to the mentioned central bank announcements, ADP employment report and ISM non-manufacturing index will be featured.

The mostly watched event of the day will be BoE rate decision. Sterling has been strong, supported by expectation that BoE will hike 25bps to 5.75% today. The expectation was triggered by minutes of last month's tight 5-4 vote to keep rates unchanged, with Governor Mervyn King voted for a hike indeed, along with John Gieve, Tim Besley, and Andrew Sentance. Later in the Testimony to Treasury Committee, King continued to emphasize the upside risks to inflation. Besley said that by moving immediately, the bank would be better able to cope with the inflation created by the expansion of demand. John Gieve also reiterated rates were not rising fast enough to contain credit growth. Looking at the economic picture, house prices continued to growth strongly with credit demand only showed little sign of easing. That will provide the hawks with bullets to convince for an immediate hike. However, headline inflation has softened a lot from March's peak of 3.1% to 2.5% while factory gate inflation is at a reasonable level. That will continue to provide the support for the doves to continue their wait-and-see for more data stance. The decision today will be a tight a difficult one and could flip either way with a tight margin. Technically speaking, GBP/USD is now met an important upside target of 2.0207 and turned sideway since then. Further upside is still in favor as long as 2.0130 minor support holds. However, a drop below would likely trigger profit taking and a deeper pull back before building the base for another rally.

ECB is widely expected to keep rates unchanged at 4.0% today. Focus will be on Trichet's press conference again. Note that Trichet still described monetary policy as "still on the accommodative side" last month which suggested that ECB is still having a tightening bias. The coming meeting in August will be carried out over the phone instead of meeting in person in Frankfurt. And, in its entire history, the ECB has never agreed on rate changes at a summer phone conference. So, there shouldn't be any signal for rate hike, and no mentioning of the magic word "vigilance" in today's press conference. Instead, markets are expecting a Sep hike. Today's focus will actually be on hints of monetary policy movements beyond September.

Out of US, two market moving economic data will be featured. The ADP employment report, which is usually used as a preview to Non-Farm Payroll, is expected to show improvement in job growth from 87k to 100k in Jun. Surprise in this data will likely change the expectation on tomorrow's NFP which is expected to show 129k job growth in the same month. Meanwhile, ISM non-manufacturing index is expected to drop slightly from 59.7 to 58.0 in Jun. Price Paid index is expected to moderate from 66.4 to 64.0, which will be consistent with the ISM manufacturing price index which showed easing in pipeline inflation pressure.

USD/CAD spiked to a new 30 year low last Friday but turned into choppy consolidation after disappointing GDP data. Technically speaking, the consolidative nature of this week's price moments suggest that 1.0468 is not an important bottom yet and further downside is still expected to follow. Markets will be closely watching today's Ivey PMI, which is expected to rise from 62.7 to 63.0 in Jun and that could be the trigger for resumption of fall in USD/CAD.

EUR/USD

Daily Pivots: (S1) 1.3601; (P) 1.3616; (R1) 1.3626

EUR/USD's recent rally resumes in early European session by breaking above 1.3637 and reaches as high as 1.3645 so far. At this point, intraday bias remains on the upside as long as EUR?USD stays above 1.3603 minor support. Further rise is expected to be seen to retest 1.3681 high. Touching of 1.3603 will suggest that a short term top is formed, possibly with bearish divergence conditions in 4 hours MACD and RSI. In such case, deeper pull back could be seen towards 4 hours 55 EMA (now at 1.3528) before staging another rally.

In the bigger picture, break of mentioned 1.3553 resistance confirms that fall from 1.3681 is corrective in nature, completed with three waves down to 1.3262, just meeting 100% projection of 1.3681 to 1.3391 from 1.3553 at 1.3263. In other words, with whole up trend from 1.1639 is still in progress, also considering that medium term rising channel remains intact. Further rally is expected to be seen towards 61.8% projection of 1.2865 to 1.1.3681 from 1.3262 at 1.3766.

However, we maintain that risk of medium term reversal remains high. Upside momentum continues to diminish with bearish divergence condition in daily MACD and RSI. As discussed before, whole medium term up trend from 1.1639 is interpreted as having first move completed with three waves up to 1.2978, subsequent sideway consolidation completed at 1.2483. Rise from 1.2483, which is treated as resumption of up trend from 1.1639. Such up trend is now is expected to terminate between 61.8% projection of 1.2865 to 1.1.3681 from 1.3262 at 1.3766 and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822.

But still, even though a break below 1.3421 support will turn short term outlook bearish again, sustained trading below medium term rising channel support (now at 1.3129) is needed to confirm whole up trend from 1.1639 has completed. Otherwise, another high could still be seen before EUR/USD finally make an important top.

GBP/USD

Daily Pivots: (S1) 2.0140; (P) 2.0171; (R1) 2.0193

Cable continues to consolidate below 2.0206 high today. But after all downside is still contained by 2.0130 minor support. Consolidation would still likely be brief as long as this minor support holds. And sustained break of 2.0206 high will further confirm underlying medium term strength in cable and bring another powerful rally.

However, note that an important medium term target of 61.8% projection of 1.9183 to 2.0132 from 1.9621 at 2.0207 is met. Break of 2.0130 support, with 4 hours MACD staying below signal line, will suggest that at least a short term top is formed and bring deeper pull back to 4 hours 55 EMA (now at 2.0065) or lower.

In the bigger picture, the completion of the fall from 2.0132 in a corrective 3 wave manner and the holding of the medium term rising channel indicates that rise from 1.8090 is still in progress, so is the whole up trend from 1.7047. There are various interpretation of the rally from 1.7047 but none is really convincing yet. Also, medium term upside momentum remains unconvincing with bearish divergence conditions staying in weekly MACD and RSI as well as daily MACD and RSI.

Focus should now be on 2.0207 projection target. Sustained break of this level will add 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. On the other hand, failure of taking out this projection target and sustained trading below medium term rising channel (now at 1.9744) will argue that whole rise from 1.7047 has completed and put 1.9183 support into focus.

USD/CHF

Daily Pivots: (S1) 1.2148; (P) 1.2158; (R1) 1.2172

USD/CHF's recovery from 1.2089 is limited at 1.2176, below 38.2% retracement of 1.2339 to 1.2089 at 1.2185 and falls sharply in early European session today. The strength of the current fall suggest that consolidation could have completed. 1.2089 low is now is focus and break will confirm that recent sharp decline from 1.2467 has resumed for 1.1993 low. However, above 1.2176 again will indicate consolidation is still in progress for 1.2185 fibo resistance or above. But still, upside should be limited below 1.2258 support turned resistance and bring another fall.

In the bigger picture, break of 1.2146 support confirmed that rise from 1.1993 has completed with three waves up to 1.2467. Such development revived the case that price actions from 1.1919 is merely a medium term triangle consolidation and could have already completed at 1.2467. Sustained break of 1.1993 low will confirm such case and indicate that whole medium term down trend form 1.3283 has finally resumed for next downside target of 1.1878 low first.

However, note that USD/CHF is still kept inside established range of 1.1878 and 1.2571. Above 1.2239 resistance will indicate that current fall from 1.2467 has completed and turn short term outlook mixed again as consolidation continue to extend inside mentioned range.

USD/JPY

Daily Pivots: (S1) 122.37; (P) 122.54; (R1) 122.87

USD/JPY's corrective fall from 124.13 was contained at 1.2208, supported by mentioned 122.01/05 cluster support (61.8% retracement of 120.76 to 124.13 at 122.05 and 23.6% retracement of 115.13 to 124.13 at 122.01). Subsequent recovery has pushed USD/JPY briefly above 122.72 minor resistance, with both 4 hours MACD and RSI breaking their down trend. A short term bottom is likely formed at 122.08 already. Despite the pull back in early European session, further rally is in favor towards 123.55 resistance. And break will confirm that correction from 124.13 has completed and bring retest of this high.

In the bigger picture rise from 115.13 is still in progress with 122.01/05 cluster support (61.8% retracement of 120.76 to 124.13 at 122.05 and 23.6% retracement of 115.13 to 124.13 at 122.01) remains intact. Such rally is treated as resumption of the rise from 108.99, which in turn, is the resumption of whole up trend from 101.66 after interim correction has completed with three waves down from 121.38 to 108.99. Further rally is expected to be seen to next medium term target of 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 122.01/05 cluster support will indicate rise from 115.13 has completed and bring deeper correction to next cluster support of 120.76 (38.2% retracement of 115.13 to 124.13 at 120.69). But still, rise from 108.99 is still in force as long as pull back is contained well above 115.13 low.

Also, note that USD/JPY is staying comfortably above the long term falling trend line (147.68 to 135.20). Multi-year consolidation pattern that started from 147.60 should have already completed. But, whether current rise from 101.65 represents the resumption of whole up trend from 79.75 remains to be seen. Note that above mentioned medium term projection target of 100% projection of 108.99 to 122.17 from 115.13 at 128.31 and 100% projection of 101.65 to 121.38 from 108.99 at 128.72 are in proximity to 78.6% of 135.20 to 101.65 at 127.95. This cluster resistance zone will be important to determine the long term trend.

EUR/JPY

Daily Pivots: (S1) 166.55; (P) 166.82; (R1) 167.29

EUR/JPY's rally resumes today by breaking to new record high of 167.27 so far. As discussed before, rise from 164.23 is treated as resumption of rally from 161.49. At this point, intraday bias remains on the upside as long as 166.19 support holds and current rally is expected to extend to 61.8% projection of 161.49 to 166.94 from 164.23 at 167.60 first.

However, below 166.19 will argue that the rise from 164.23 has completed and is indeed part of a lengthier consolidation that started at 166.94. In such case, another fall to retest 164.23 low could be seen before finishing the consolidation. But downside is expected to be contained above 61.8% retracement of 161.49 to 166.94 at 163.57 and bring another rally.

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 upside target will be 100% projection of 137.16 to 159.63 from 150.75 at 173.22.

On the downside, it will take a break of 161.49 support to indicate rise from 150.75 has completed. Otherwise, further rally is still in favor even in case of pull back