Euro in Range, Sterling Retreats after Central Banks on Hold

Euro in Range, Sterling Retreats after Central Banks on Hold

Euro stays in tight range while Sterling retreats mildly term ECB and BoE left rates unchanged. ECB kept rates unchanged at 4.00% today. In the following press conference, Trichet said that even though policy stance is still on the "accommodative side" and inflation risks remains on the upside in the medium term, more information is needed before the next policy move. Also Trichet said that it's too early to draw conclusion from the current correction in risk reassessment. No "vigilance" was used by Trichet this time which suggests that ECB will be on hold for a while, at least, till Oct. One thing to note is that Trichet emphasized a few times that ECB has to ensure that money markets function properly whatever the interest rate is and that this is completely separate topic to maintaining price stability. Also, ECB announced a new long-term refinancing operation as a supplementary operation will be conducted, the details of which will be available right after the press conference.

BoE kept rates unchanged at 5.75% as widely expected. In the accompanying statement BoE expect inflation to remain close to its 2% target, or a "little below", in the next few months. Also, "tentative signs of a lowing in consumer spending" is noted. But "indicators of pricing pressure remain somewhat elevated. " Regarding the recent credit crunch, BoE noted that it's too soon to tell how the disruption in financial markets will impair the availability of credit to companies and households but will monitor closely the evolution of both "credit spreads" and the "quantities of credit extended". more details will be available in the minutes to be published on Sep 19.

From US, jobless claims dropped more than expected to 318k. Q2 productivity accelerated more than expected to 2.6% while unit labor costs slowed to 1.4%, suggesting reduced risk of wave inflation. Next will be ISM Non-manufacturing Index. Dollar has been pressured since yesterday's poor ADP and pending home sales. Additional pressure will be seen in case of downside surprise in today's ISM non-manufacturing index as markets are already speculating and poor NFP number tomorrow.

FX Markets Quietly Steady after Existing Home Sales

FX Markets Quietly Steady after Existing Home Sales

The forex markets are quietly steady in early US session. Existing home sales in US dropped merely 0.2% in Jul from an upwardly revised 5.76m annualized rate to 5.75m. Though it marked a fifth consecutive decline in the existing home sales and is the lowest reading since Nov 02, it's slightly better than expectation of 5.70m. The inventory-to-sales ratio surged to 9.6 months, while the median existing price is down by 0.6%. The data offered no catalyst for more volatility in the markets. Focus will be shifting to tomorrow's Germany Ifo and Eurozone M3.

Speaking of the Euro, the highly anticipated speech from Trichet has just focused on productivity. He said that eurozone productivity growth is "disappointing" comparing with more resilient growth in the US. And it is also "not particularly high" compared with previous business cycles. Productivity growth has been stronger in the manufacturing sector. But in services sector, it has not improved much. Trichet has signaled a Sep hike in the Aug ECB meeting just before turmoil in the financial markets. Markets hoped for some hints from Trichet on whether ECB will still hike or not in today's speech.

EUR/USD's

EUR/USD's rise from 1.3391 stalls after breaking short term falling trend line (now at 1.3523) briefly. Nevertheless, intraday bias will remain on the upside as long as 1.3487 holds. Since the corrective fall from 1.3681 is regarded as completed with three waves down to 1.3391 with bullish convergence condition in 4 hours MACD and RSI, further rally is expected to follow to towards 1.3609 resistance. Break will encourage a retest of 1.3681 high.

On the downside, touching of 1.3487 will turn intraday outlook consolidative first. In case of pull back, sustained trading below 1.3364 cluster support is needed to confirm underlying bearishness. Otherwise, the corrective fall from 1.3681 is still considered either ended or to be ended soon. That is, another strong rebound is likely to follow.

In the bigger picture, with 1.3364 cluster support (38.2% retracement of 1.2865 to 1.3681 at 1.3369) remains intact, the rise from 1.2865 is still expected to resume to above 1.3681. However, risk of medium term reversal is still high. As discussed before, 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 is treated as resumption of the whole up trend from 1.1639. With such interpretation, we'd expect risk of medium term reversal to increase significantly after EUR/USD met resistance zone between 1.3668 and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. Hence, focus is now on reversal signals.

On the downside, decisive break of 1.3364 cluster support (38.2% retracement of 1.2865 to 1.3681 at 1.3369) is needed to confirm a medium term top is made. More importantly, with bearish divergence condition in daily MACD and RSI, this will warn that the whole rally from 1.2483 has also completed, and, so is the whole up trend from 1.1639. Focus will then be back to medium term rising channel support (now at 1.3049).

Daily Pivots: (S1) 1.3489; (P) 1.3520; (R1) 1.3555