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Thursday August 3, 2006 - 14:53:36 GMT
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Forex Market Update

Published: Aug. 03 2006, 13:35 GMT

Surprise BoE and Hawkish ECB

As expected, today is turning out to be a volatile as traders adjust to the rapidly changing economic environment. This afternoon’s US ISM figure should be a very interesting.

MAJOR HEADLINES – PREVIOUS SESSION
• SZ CPI (Jun) MoM -0.7% vs. -0.5%, YoY 1.6% vs. 1.4%
• UK HBO House Price 3mths/year 8.9% vs. 8.9% exp, (MoM) 0.2% vs. 0.5% exp.
• EuroZone Retail Sales (Jun) MoM 0.5% vs. 0.8% exp., YoY 1.5% vs. 1.5% exp
• BoE raises rates .25% to 4.75%
• ECB raises rates .25% to 3.00%
• NZ ANZ Commodity Prices (Jul) rose to .4% vs. -0.9% prior
• US Initial Jobless Claims (Jul) 315K vs. 308K exp.
• US Continuing Claims (Jul) 2460k vs. 2480k exp.
FROM THIS MORNING UPDATE
• MBA Mortgage Applications (Jul) -1.2% vs. -1.3% prior.
• US ADP Employment Changes (Jul) 99k vs. 368k exp.
• Australian AIG Performance of Service Idx (Jul) 50.4 vs. 52.6 exp.
• China says they need to actively manage 20-30% for their reserves and increase gold reserves.
• Israeli PM Ehud Olmert said conflict could be coming to a close as soon as the UN authorizes peaces keeping force.
• North Korea press reports that North Korea is building missile bases to target Japan.

THEMES TO WATCH – UPCOMING SESSION
UK
The BoE surprised the market this afternoon by unexpectedly raising official Bank rate to 4.75 from 4.50%. The BoE has chosen a different path when addressing monetary policy then other central banks by fighting inflation over the risk of hurting growth. However, The UK economy has been showing robust figures illustrating it could handle additional rate hikes that perhaps the US could not.

The text form the Monetary Policy Committee says it best.
“Against the background of firm growth, limited spare capacity, rapid growth of broad money and credit, and with inflation likely to remain above the target for some while, the Committee judged that an increase of 0.25 percentage points in the official Bank rate to 4.75% was necessary to bring CPI inflation back to the target in the medium term.”

Having read through the rest of the text we are holding out our decision on additional tightening until we read the inflation report and MPC minutes next week.

ECB
As expect the ECB raised rates to 3.00% from 2.75%. This was anticipated by the market and had little over all effect. In the post decision press conference Trichet came out with very hawkish sounding comments. Trichet stated “inflation remains above 2.0% for 2006 and 2007 and additional inflation risk remain elevated.” And in the most telling statement of the day he says further rate hikes may be “warranted.” We see a clear path to for the ECB to 3.50% by years end and considerable EURUSD appreciation if the FOMC goes into a hold pattern on Tuesday.

USD
We saw a slight uptick in both Initial Jobless and Continuing Claims this afternoon, however with all the movement due to BoE and ECB, these numbers were shrugged off. Tomorrow they could help proved some direction and insight for Non Farm Payroll which we now expect will come in as forecast. Overall the number of US workers filing for jobless benefit for the first time rose slightly, but these figures still reflects a tight labor market.

FROM THIS MORNING UPDATE
• 11:00 BoE Announces Rate Decision.
• 11:45 ECB Announces Rate Decision , then Press Conference.
• 12:30 US Initial Jobless Claims (Jul 29) 308k exp.
• 12:30 US Continuing Claims (Jul 22) 2460k exp.
• 14:00 US Factory Orders (Jun) 1.8% exp.
• 14:00 US ISM Non-Manufacturing (Jul) 56.8 exp.

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.

Euro/US Dollar
EURUSD (1.2808 @ 13:33 GMT)
Weekly Update: EURUSD broke the June lows last week, but was unable to close below 1.2465 50% retracement (form 1.1950-1.2979) keeping the bull trend line from February intact. Look for a daily close above 1.2705 which would give scope for increased upside acceleration for a retest of the inverse-head-and shoulder target at 1.2980.

Thursday: EURUSD lacked direction yesterday as the market awaits US NFP Friday. Expect a range bound day, but continue to favor buying the pair towards 1.2700-30 support stop below 1.2660 target 1.2850.

Resist.
1.2920
1.2860
1.2823
1.2808
1.2763
1.2739
1.2678
Support

Quoted:
03 Aug 06
13:33 GMT


British Pound/US Dollar
GBPUSD (1.8887 @ 13:33 GMT)
Weekly Update: GBPUSD broke key resistance last week at 1.8545 which was the level to look for if upside acceleration was once again to be seen. This gives scope for a 1.8750 and possible 1.8900 target in the upcoming trading week. Intra-week support is now at 1.8400.20.

Thursday: GBPUSD higher on the weaker USD. The BoE rate decision today. The surprise is if they decide to hike, but is expected to remain at 4.50%. Buy dips towards 1.8710-25 targeting new highs this week.

Resist.
1.8896
1.8831
1.8800
1.8887
1.8735
1.8700
1.8635
Support

Quoted:
03 Aug 06
13:33 GMT


US Dollar/Japanese Yen
USDJPY (115.03 @ 13:33 GMT)
Weekly Update: USDJPY made a sharp reversal last week after falling short of testing 118.00 resistance. The pair continues to trade within the longer term bear trend line from 1998 presently at 119.00 and last week’s sell-off gives scope for a 114.65 target this week 38% retracement (from 108.97-117.86) and then to 113.40 support.

Wednesday, Thursday: USDJPY traded choppy before and after US data, but was unable to keep gains made through the late European session. Sell the pair on rallies towards intra-week fibo resistance at 114.65-80 for a test of 114.00 short term.

Resist.
115.96
115.27
114.97
115.03
114.28
113.90
113.22
Support

Quoted:
03 Aug 06
13:33 GMT

Risk warning
Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated.

Please read our full Analysis Disclosure & Disclaimer at www.saxobank.com/analysis/disclaimer.

Saxo Bank
Saxo Bank

 

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