USD: Focus shifts from Middle East to Bernanke

EUR USD (1.2495)
The European mid-morning on Tuesday brought with it a brief sell-off, which sent the single currency straight through the $1.25 ‘psychological’ barrier. With the euro optically cheap it is hard to imagine that traders would have tried it from the short side. Instead, it provided the ideal opportunity for dip-buyers to jump in, which saw the single currency recovering up to 1.2560. However, after a bit of churning it finally slumped to 1.2475. Yesterday’s German ZEW investor confidence number, which came in far below expectation, provided those who wanted to cut back on short dollar positions with a reason to do exactly that. In addition, it seems that against the backdrop of hawkish ECB comments and expectations for a eurozone rate hike that traders are sensitive to data that comes in below expectation.

Nevertheless, the market movements left the impression that traders did not really know what to do with the euro yesterday as it stayed relatively buoyant on lower levels. Even if tension in the Middle East were to escalate, traders perceive the developments with shrinking sensitivity. In this respect it had already lost its number one spot yesterday as market participants started to focus on economic data. However, both the strong US producer price inflation and capital flows data were also not really able to move the market. It was already clear at the start of the week that traders are far more interested in Bernanke’s semi-annual monetary policy report. Of interest is what he has to say about the future of interest rates, particularly as the expectation for a Fed hike diminished with only 65 per cent expecting a hike in August.

The outlook for the euro remains unchanged for today with the current risk still being a setback to 1.2410 or even to 1.2360/70. We would adopt a bullish strategy at the former with a limit below the latter. If a positive orientation is triggered the target will be an upturn to 1.2665.

USD JPY (117.40)
The second objective remains at 118.50. On the news front it proved to be a rather quiet day as far as the yen was concerned. However, it seems as if the unwinding of long yen positions are just continuing in the wake of a slower than expected pace of rate hikes by the BoJ. In the light of this, the dollar continued its upward stroll and peaked almost at 117.60 yesterday. For today we expect that any further upward attempt will run into an intermediate hurdle at 117.90. In the event of a dip, our tightened 116.50 risklimit to the bullish orientation should not be violated. To the downside, we reckon with critical support at 115.10.

EUR JPY (146.70)
The cross still remains full of vigour and we continue to look for fresh highs at 147.70 and thereafter to 148.60, which also mark the next reliable resistances. Any sign of weakness could expect supports at 146.00/20 and at then at 144.75 (critical). The first mentioned point is again the entry level for a bullish strategy with a tight limit below. In the event that a positive strategy kicks in, the second resistance will then represent the target.

EUR GBP (0.6850)
The single currency slipped below its best support at 0.6860/70 (apologies) and has opened the door for further weakness to 0.6790 or even to 0.6730. Overhead resistances are visible at 0.6875 and at 0.6910. With the first resistance as a limit, the second support could even be treated as a target.

GBP USD (1.8255)
The current objective remains 1.7930. Housing data that came in above expectation together with an increase in UK inflation provided those traders who wanted to buy Sterling with a reason to do so. It is clear that for many this just put the possibility of a BoE rate hike back on the table. Intermediate support comes in at 1.8040 for the time being. The limit within the bearish orientation remains tight at 1.8345/50. Cable will only achieve short -term stability beyond 1.8475.

AUD USD (0.7450)
Despite a report on a healthy economic outlook for May, traders seemed to be more interested in commodity prices. The AUD continues fighting with the 0.7445/50 support. Below this point, the demand situation would become flimsy which could result in a setback to 0.7360. To the upside, be on the lookout for supply at 0.7490 and at 0.7530.