Dollar continues to strengthen as Hurricane Rita was much kinder than Katrina with the damage… … very minimal compared to the previous one. Major refineries were spared of a direct impact and the sheer relief of the eventual outcome is leading to oil prices easing back further and the Dollar staying well supported. The focus should shift back to the prospect of further rate hikes in the U.S. while focus will also be on the U.S.’s ability to maintain its steady forecasted growth levels. This week’s data is eyed keenly to see if the manufacturing sector can rebound after oil related declines while the political uncertainty in Europe should also support the Greenback.

· Euro has finally decisively broken below the strong support it had around 1.21 which held well for the past two months and its losses have accelerated towards 1.20 on the relief rally for the Greenback. This week has lots of data releases from the Zone with data from Germany and France expected to remain steady but since the Euro is not just made up of these two nations but ten others, focus will also be on Italian data which is the biggest cause of concern for the Zone at the moment. Earlier on Friday, Italian Retail Sales declined against expectations of an increase as high oil and energy prices have severely curbed the already beleaguered consumer spending sector. Meanwhile, German political drama continues but this week could see some sort of compromise from the two big parties.

· Yen experienced volatile price action on Friday thanks to the market’s conflicting interpretation of China’s move to widen its trading band for the Yuan against non-Dollar currencies to 3% from 1.5%. Since Yen has been used as a proxy for the Yuan any move from China instantly leads to Yen buying and it gained towards 111, however this move be it merely a symbolic one, was bearish for the Yen since Yuan would strengthen modestly against it, thus leading to the Yen slipping down towards 112.50 as Dollars’ general rally also weighed in against it. Nonetheless, Japan’s growth outlook looks promising with this morning’s survey of Large Manufacturers showing an optimistic reading for the first time in a year while the Non manufacturer’s survey increased as well. This augurs well for a strong reading in the crucial Tankan surveys.

· Pound slipped back further as it continues to be laid bare by its diminishing yield advantage over the Dollar while its own growth concerns persist. The sluggish consumer spending sector hasn’t pick up as hoped after the recent rate cut but for now inflationary pressures could prevent any further rate cut in the near future. Further clues would be received in today’s release of Bank of England’s Quarterly Bulletin with the tussle between high inflation and slow growth. In the current environment of mixed global demand, a steady pick up in domestic demand is to be seen to prevent the Pound from falling further.

· Aussie saw another day breaking another key support level as like the Pound the yield story should continue to keep the Aussie under pressure while the mixed outlook for commodities should see volatile moves in the Aussie in line with profit taking on key commodities. Gold prices have eased back for now but the outlook is mixed with demand for key commodities steady, especially from Asia.

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Economic Data Released

GMT Release Region Previous Actual Comment
06:00 August Import Price index m/m Germany 0.6% 0.9% Import prices keep rising on high oil and energy prices.
09:00 July Retail Sales Italy -0.2% -0.3% Lower than expected as high oil prices curb spending.

Upcoming Economic Releases
GMT Release Region Previous Forecast Comment
09:00 July Industrial Orders m/m Italy 2.0% -0.3% Poor domestic demand should keep new orders low.
14:00 August Existing Home Sales USA 7.16Mn 7.11Mn Home sales to remain around robust levels

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Key Intra-Day Pivot levels

EUR/USD – Friday’s low was 1.2038 and high was 1.2168.
The pair closed at 1.2038.
The pair has finally broken decisively below the key 1.21 mark after nearly two months and losses have accelerated towards 1.20 where decent bid interest is expected. A clear break below has the potential to further accelerate losses towards the strong support mark of 1.1910 with decent id interest down till 1.890. A break below will shift the Euro in deep negative territory and make it very hard to pare back its losses. On the upside, mild resistance has now moved down to 1.2145 mark with a break above to bring mixed interest till the 1.2275-1.23 region where resistance is very strong.
Key resistance is seen at 1.2145 followed by 1.2275 while support starts at 1.1990 followed by 1.1910.

USD/JPY – Friday’s low was 111.14 and high was 112.51.
The pair closed at 112.48.
The pair finally broke decisively above the 112 mark with mixed interest seen till the 113 mark which could lead to slow movements. The 112 region is littered with bid and offers with strong resistance seen in the 113.15-30 region with a clear break above to shift the Yen into deep negative territory. On the downside, immediate support has moved up to the 111.55 mark with very strong bid interest on any break below 111 with strong support around it. In ability of the Dollar to break above 113 could see the pair resonating within the 111-113 region.
Key Resistance is seen at 112.75 followed by 113.30 while support starts at 111.55 followed by 111.05.

GBP/USD – Friday’s low was 1.7749 and high was 1.7927.
The pair closed at 1.7750
The pair has broken down with key support levels breached which further accelerated the losses and the Pound remains under deep pressure. Intra day oversold conditions might help it find good bid interest around 1.77 with mixed interest seen till the 1.7840 mark where resistance is strong. A break above the 1.79 region sees selling orders strengthening with resistance around 1.7920. On the downside, key support lies in the 1.7640-55 region but data is eyed form both sides for a clearer direction.
Key Resistance is seen at 1.7840 followed by 1.7920 while support starts at 1.7700 followed by 1.7640

AUD/USD – Friday’s low was 0.7569 and high was 0.7621.
The pair closed at 0.7570.
The pair finally formed a definitive direction and it is to the downside with support around 0.76 broken as well. Immediate support lies around the 0.7545 mark, another break here is likely to accelerate its losses towards the 0.7470-85 region which is expected to hold well. On the upside, immediate resistance has moved down to 0.7625 with any move above to face selling orders lined up to 0.77 where resistance is very strong.
Key Resistance is seen at 0.7625 followed by 0.7690 while support starts at 0.7545 followed by 0.7475.

Kunal Sharma
E-mail: kunal@easy-forex.com
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