Mid-Day Report: Sterling Extends Rally, Dollar Rebounds against Yen on a Data Driven Day

It’s clearly a data driven day. Dollar remains pressured at fresh 26 years low against Sterling in US session, but steadies against Euro. Even though headline PPI in US slowed more than expected to 3.3% yoy, dollar is supported by stronger than expected core PPI which accelerated to 1.8% vs exp of 1.6% which core PPI stayed there for 3 months. In addition, dollar is indeed driven higher against the Japanese after TIC capital flow rose to fresh record high of $126.1b, much higher than expectation of $70b.

Sterling was boosted higher earlier today on higher than expected consumer inflation data. In Jun, CPI moderated to from 2.5% yoy to 2.4%. However, that was higher than consensus of 2.3%. Meanwhile, RPI, retail price index, indeed accelerated from 4.3% yoy to 4.4% even though core RPI stayed at 3.3%. The data clearly indicates that there is no solid support by BoE to relax its tightening bias yet as inflation may not moderate as fast as BoE members would like to see. And, should inflation stabilizes above the 2% target, or even worse, re-accelerates, BoE will be forced to have another hike. The MPC meeting minutes will be released tomorrow and will then be closely watched on how nervous the members were and thus provide a more accurate assessment on the possibility of another near term hike.

On the other hand, Germany’s ZEW was a big disappointment today, nose-diving from 20.3 to 10.4, much worse than expectation of 21. The index peaked in May at 24.7 and has been deteriorating since then. The drop in business confidence highlighted the risk that current rise in the Euro, in particular against dollar and yen, are starting to weigh on export driven manufacturing economy and domestic demand to import. Euro is still steady against dollar but is under tremendous pressure against Sterling. EUR/USD

Daily Pivots: (S1) 1.3753; (P) 1.3778; (R1) 1.3796; «www.actionforex.com»

Not much to add. EUR/USD continues to trade in tight range below key medium term resistance of 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. Though mild bearish divergence conditions in 4 hours MACD and RSI suggest upside momentum is diminishing, a break below 1.3729 minor support is needed to indicate a short term top is formed. Otherwise, further rally is still in favor. Below 1.3729 will bring deeper pull back to 4 hours 55 EMA (now at 1.3706 first).

In the bigger picture, the current development is dampening the original view that rise from 1.3262 is the last advance in a five wave structure that started at 1.2483. Firstly, the current momentum of the rise from 1.3262 is seen stronger than the prior rally from 1.2865 to 1.3681. Secondly, the falling trend line in both daily MACD and RSI were broken, negating the bearish divergence conditions. In other words, the underlying bullishness in EUR/USD could be much stronger than we originally thought.

Focus remains on 1.3822 resistance. Sustained trading above this level will add much weight to the case that whole medium term rally from 1.1639 is indeed resumption of multi-year up trend from 0.8223 (00 low). That is, further rise should be seen in medium term towards 95 high of 1.4523 with much chance to extend further to 61.8% projection of 0.8223 to 1.3668 from 1.1639 at 1.5004.

On the downside, failure to take out 1.3822 decisively, followed by a break of 1.3262 support, will retain the original case. That is, medium term rally from 1.1639 has likely completed after being limited by 1.3822 resistance as expected. Deeper decline should then be seen to 1.2978 cluster support first (38.2% retracement of 1.1639 to 1.3813 at 1.2983) and then next cluster support at 1.2483 (61.8% retracement of 1.1639 to 1.3813 at 1.2469). Also, since in such case, rise from 1.1639 is likely merely part of a larger scale consolidation that started at 1.3668 there will be much chance of extending the fall to retest 1.1639 low before completing the consolidation.

GBP/USD

Daily Pivots: (S1) 2.0320; (P) 2.0361; (R1) 2.0400; «www.actionforex.com»

Sterling powers through 2.04 level today and surges to as high as 2.0474 so far. Rally from 1.9621 is still in force and at this point, as long as 2.0348 support holds, further rise is expected to be seen towards next upside target of 100% projection of 1.9183 to 2.0132 from 1.9621 at 2.0570. However, as bearish divergence could continue to stay in 4 hours MACD and RSI, a break below 2.0348 support will argue that a short term top is possibly formed and bring pull back to 4 hours 55 EMA (now at 2.0262) first. But downside should be contained by 2.0056 support and bring another rise.

In the bigger picture, the sustained break of 2.0207 projection target confirms underlying upside momentum is still strong. Also, it added 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.

Having said that, even in case of a short term correction, downside should be contained above 1.9783 resistance turned support and bring medium term rally resumption. Also, break of 1.9862 low is needed to indicate a medium term top is formed and turn outlook neutral. Otherwise, medium term outlook will remain bullish.

USD/CHF

Daily Pivots: (S1) 1.2006; (P) 1.2021; (R1) 1.2049; «www.actionforex.com».

Once again, USD/CHF fails to take out 1.1993 cluster support (61.8% projection of 1.2467 to 1.2089 from 1.2232 at 1.1998) decisively and recovers back to established range. Nevertheless, intraday bias remains ont he downside as long as 1.2038 resistance holds. Further decline is still in favor towards next downside target of 1.1878 (06 low). However, above 1.2038 will indicate that a short term bottom is likely formed with bullish convergence condition in 4 hours MACD and RSI. This should bring stronger rebound to 4 hours 55 EMA (now at 1.2081) and above.

In the bigger picture, USD/CHF has likely completed a medium term triangle consolidation already, which started at 1.1919 with five waves to 1.2467. Firm break of 1.1993 will confirm this case. 1.1878 (06 low) will be the initial target. And since, in such case, fall from 1.2467 is viewed as resumption of medium term down trend from 1.3283, further weakness should be seen to 100% projection of 1.3283 to 1.1919 from 1.2768 at 1.1404, with much chance to extend to retest 1.1288 (04 low).

On the upside, break of 1.2232 resistance will mess up the short term picture a little bit. In such case, chance is swung to the case that the triangle consolidation indeed started at 1.1878. In other words, the overall outlook didn’t change and just that another rally should be seen before completion. Hence, even in such case, upside should be limited below 1.2467 high and bring another medium term decline.

USD/JPY

Daily Pivots: (S1) 121.56; (P) 121.87; (R1) 122.19; «www.actionforex.com»

USD/JPY rebounds strongly on broad based yen weakness. Break of 122.18 minor resistance shifts intraday bias back to the upside and further rise should be seen to 122.60 resistance. Break will indicates the rally from 120.96 has resumed. In other words, this will also add much weight that correction from 124.13 has completed at 120.96. Further rise should then be seen to 123.66 resistance. Break will bring retest of 124.13 high.

On the downside, below 121.54 will turn short term outlook mixed again. In such case, correction from 124.13 could still be in progress for another test of 120.76 cluster support (38.2% retracement of 115.13 to 124.13 at 120.70) before completion.

In the bigger picture, rise from 115.13 has made a top at 124.13 and turned into consolidation since then. But still, rally from 108.99, which is treated as resumption of whole up trend from 101.66, is still in progress. Even in case of a deeper correction, downside is expected to be contained by 118.35/57 cluster support zone (38.2% retracement of 108.99 to 124.13 at 118.35 and 61.8% retracement of 115.13 to 124.13 at 118.57) and bring rally resumption. Next medium term upside target will be 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 118.35/57 cluster support argue that rise from 108.99 has possibly completed and put 115.13 low into focus.

EUR/JPY

Daily Pivots: (S1) 167.60; (P) 167.97; (R1) 168.22; «www.actionforex.com»

EUR/JPY’s strong rebound and break of 168.41 minor resistance suggests that retreat from 168.93 has completed after drawing support from 4 hours 55 EMA. Intraday bias is turned back to the upside for retest of 168.93 high. Break will indicate recent rally from 161.49 has resumed for next upside target of 100% projection of 161.49 to 166.94 from 164.23 at 169.68. However, a break below 167.71 again will indicate that a short term top has likely completed, possibly with bearish divergence conditions in 4 hours MACD and RSI. In such case, deeper decline should be see to166.69 support first.

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

However, break of the short term rising trend line support (now at 165.22) will dampen this view and indicate that the rise from 150.75 has possibly completed earlier then we thought.In such case, deeper decline should be seen to test 161.49 low first.

Latin America, Africa & Middle East, Asia, Emerging Europe & Cis

LATIN AMERICA

Argentina

Argentine President Nestor Kirchner's approval rating fell to 52 percent in June from57 percent the previous month, according to pollster Poliarquia. The president's ratings have fallen from as high as 82 percent in February 2002. The president's image has suffered as Argentines cope with cold weather and energy rationing coupled with food shortages stemming from the second-fastest inflation rate in South America. Kirchner, 57, has said he or his wife, Senator Cristina Fernandez de Kirchner, may run for president in October.

Brazil

Brazil's central bank raised its economic growth forecast for this year to 4.7 percent from a previous estimate of 4.1 percent in March. In addition, policy makers lowered their 2007 inflation forecast to 3.5 percent from an earlier estimate of 3.8 percent, according to the central bank's quarterly report on inflation released on its Web site today. For 2008, the central bank lowered its estimate for consumer prices to 4.1 percent compared with a previous 4.4 percent, the report showed. Central bankers, led by Henrique Meirelles, lowered the overnight lending rate by half a percentage point to 12 percent on June 6. The bank has cut the rate from a high of 19.75 percent in September 2005.

Brazil's foreign currency reserves surpassed the country's foreign medium- and long-term debt, the Estado news agency reported. Foreign reserves rose by $736 million last Tuesday and reached $145.501 billion, the agency said without citing where it got the information. That was more than the $145.401 billion in foreign medium- and long-term debt at the end of April, the latest data available, Estado said. The rise in foreign reserves Tuesday came in part from a recent 750 million Brazilian real ($386 million) reopening of the Treasury's 2028 bond, and from central bank dollar purchases at a spot market auction Friday, according to Estado.

Mexico

Mexico may win a credit rating increase should President Felipe Calderon push legislation through congress that would boost tax collection, said Joydeep Mukherji, a sovereign ratings director at Standard and Poor's. The government last week sent legislators a proposal to boost annual tax revenue by the equivalent of 3 percent of gross domestic product in an effort to ease Mexico's dependence on oil export income and keep the budget deficit in check. Calderon's success in pushing a bill through opposition-controlled congress to cut pension spending in March, just four months into his term, has sparked optimism that he'll be able to cobble together the votes needed for the tax bill. Calderon has courted opposition support through telephone calls and meetings in a bid to break the political logjam that torpedoed the legislative efforts of his predecessor Vicente Fox.

Venezuela

Bond prices suffered last week, especially CDS spreads on oil company PDVSA widened significantly on fears of a technical default.

Colombia

Fitch upgraded Colombia's ratings to one level below investment grade, citing improved debt dynamics, disciplined fiscal policies, and the government's continuous debt liability management. The outlook on all the ratings is stable.

Moody's revised the outlook on Colombia's ratings to positive from stable, citing improvement of key debt rations as a result of a recovery in growth and continued fiscal restraint.

Colombia's economy grew a higher-than-expected 8 percent in the first quarter of this year compared with a year earlier, driven by strong expansion in construction and industry. Quarterly growth was 8.09 percent without including illicit drug crop cultivation. With that data, the growth was 7.98 percent, according to the DANE government statistics agency. Analysts and the government had expected economic growth for the first quarter at around 6.5 percent to 7 percent. The Andean country is enjoying strong growth as President Alvaro Uribe draws more foreign investment by cracking down on the armed groups fighting a four-decade-old insurgency fueled by the drug trade.

AFRICA & MIDDLE EAST

Turkey

The European Union agreed to extend membership talks with Turkey to two new policy areas but stopped short of opening discussions on the key area of economic and monetary policy, central to EU membership. Ambassadors decided the EU would open talks with Ankara on the statistics and financial control negotiating chapters at an accession conference on Tuesday in Brussels, a German EU presidency spokesman said. But the presidency left the third area off the agenda after France made clear it would block starting talks on that politically sensitive issue to mark President Nicolas Sarkozy's opposition to eventual Turkish EU entry, diplomats said. A Turkish foreign ministry official said Ankara was unhappy with the fact that the bloc did not agree to start negotiations on the more important area of economic and monetary policy.

The Turkish government agreed to give state workers a 10 percent pay rise for 2007, more than double its inflation target, ahead of general elections next month. The rise would be backdated to January. Turkish inflation target for 2007 is four percent, but the actual rate is hovering near 10 percent. The 323,000 public workers' wages would be raised by 3 percent in the first half of 2008 and by another 3 percent in the second half. If inflation exceeds the pay rise in 2008, then the government will pay compensation, the minister said. Turkey will hold general elections on July 22. The pay rises would cost 800 million lira ($600 million) in extra state spending.

ASIA

Philippines

The World Bank sounded the alarm over the Philippines' failure to meet its five-month revenue target, saying it puts in question the state's ability to sustain its fiscal reforms and meet deficit goals. Outgoing country director Joachim Von Amsberg said the government should improve the efficiency of its tax collections and protect revenue collectors from political pressure. The country has set a budget deficit goal of 63 billion pesos ($1.3 billion), or 0.9 percent of GDP, for the year. But financial markets are building in expectations the government will miss its full-year target for the first time in four years as tax collections disappoint. Total revenues for the first five months of the year reached 432.6 billion pesos, 8 percent short of the government's internal targets, and inefficiencies in tax collection and administration were blamed for the shortfall. Amsberg said the government must get better at collecting what it is owed by fully implementing tax laws and reforms already in place. He added: "The second element is just absolute steadfast political support to protect the revenue generating agencies and that requires political commitment from the highest level to ensure that the tax collectors can do their job effectively and for the benefit of public coffers." The Bureau of Internal Revenue (BIR), which accounts for about two thirds of state revenues, has yet to bring about the conviction of an evader since it launched a campaign against tax evasion in 2004. It lost high-profile tax cases this year after local courts dismissed tax evasion charges against former first lady Imelda Marcos and one of the country's richest man, Lucio Tan, for lack of evidence. President Gloria Macapagal Arroyo sacked the head of the BIR this month for failing to meet targets. Finance Secretary Margarito Teves has insisted the government will meet its full-year budget deficit target with the help of privatisation proceeds estimated to reach 105 billion pesos. The Philippine central bank expects annual inflation in June to come in between 2.2 and 2.9 percent after 2.4 percent in May largely due to higher oil prices and spending related to the start of the school year, the governor said.

EMERGING EUROPE & CIS

Poland

The central bank of Poland raised its main interest rate by 25 basis points to 4.5 percent to combat soaring wages and growing inflation pressures, surprising markets and sparking speculation of at least one more increase this year.

Russia

Russia c.bank sees June inflation at 0.6 pct. Russia targets 8 percent inflation in 2007 but consumer prices rose by 4.7 percent in the first 5 months of the year as inflows of capital continue to push up money supply growth. After strong private capital inflows at the start of the year the central bank upped its full-year inflows forecast to $70 billion from $35 billion while many analysts raised doubts about the bank's ability to meet the inflation target.

Ukraine

Ukrainian President Viktor Yushchenko wants to change the constitution to create upper and lower houses of parliament, reduce the number of lawmakers and shorten theirterms in office. Yushchenko, who wants to move Ukraine closer to the European Union, dissolved parliament on April 2 and called early elections for Sept. 30. He accused the ruling coalition of bribing opposition lawmakers to oust him.

Ukrainian prime minister Viktor Yanukovych??™s political party was backed by 32 percent of voters in a May 31-June survey. Former Prime Minister Yulia Timoshenko's alliance ranked second with 17.9 percent, while President Viktor Yushchenko's Our Ukraine party came in third with 8.5 percent, the poll showed.

U.S. Forex Market Commentary

EURO

The euro weakened vis-? -vis the U.S. dollar today as the single currencytested bids around the US$ 1.3585 level and was capped around the $1.3635level. Technically, today??™s intraday lowwas right around the 76.4% retracement of the move from $1.3680 to$1.3260. Data released in the U.S. todaysaw pending sales of existing homes fall an annualized 3.5% m/m and 13.3% y/yin May, underscoring the fragile state of the U.S. housing market. Also, Redbook U.S. retail sales were off 1.1% m/min the first four weeks of June and ISCS-UBS chain store sales were up 0.1%last week. Other data released today sawMay factory orders down 0.5% from a revised +0.5% in April. The major data in the U.S. will bereleased on Friday when June non-farm payrolls data are released one day afterthe ADP private employment report. Many economists are expecting new jobscreation in the vicinity of 120,000 new jobs. In eurozone news, EuropeanCentral Bank member Bini Smaghi talked about intervention today and said theECB could act ???promptly??? but his remarks were not seen as threatening themarkets with actual intervention. TheEuropean Commission warned a further appreciation of the euro could slowexports in the eurozone. Data releasedin the eurozone today saw May producer price inflation up 0.3% m/m and 2.3% y/ywhile May unemployment ticked lower to 7.0% from 7.1%. Euro bids are citedaround the US$ 1.3550 level.

JPN/CNY

Theyen appreciated marginally vis-? -vis the U.S. dollar today as the greenback tested bids around the ??122.10 leveland was capped around the ??122.65 level. Technically, today??™s intraday low was just above the 61.8% retracementof the move from ??120.75 to ??124.15. TheMinistry of Finance announced a shakeup today in which Naoyuki Shinohara willbecome the vice finance minister for international affairs, succeeding HiroshiWatanabe as the country??™s top currency diplomat. This move will likely result in more verbalintervention. Bank of Japan DeputyGovernor Muto reiterated the central bank??™s gradualist stance on interest ratessaying ???Asstated in the (BoJ??™s) outlook report (released in April), the BoJ willgradually adjust rates in tandem with the pace of an improvement in the economyand prices, and after confirming the likelihood that sustainable economicgrowth will continue under stable price conditions.??? Data released in Japan today sawthe June monetary base fall 4.1% y/y, down for the sixteenth consecutive month.The Nikkei 225 stock index climbed 0.02% to close at ??18,149.90. Dollarbids are cited around the ??121.55 level. The euro came off vis-? -visthe yen as the single currency tested bids around the ??166.20 level and wascapped around the ??167.15 level. TheBritish pound and Swiss franc weakened vis-? -vis the yen as the crossestested bids around the ??246.25 and ??100.50 levels, respectively. InChinese news, the yuan??™s central parity rate was set at CNY 7.5951vis-? -vis the U.S. dollar, down from CNY 7.6075 yesterday.

STERLING

The Britishpound weakened marginally vis-? -vis the U.S. dollar today as cable tested bids around the US$ 2.0130 level andwas capped around the $2.0195 level. Today??™sintraday high represents a fresh multi-decade high for the pair. Traders bid the pair higher ahead ofThursday??™s interest rate decision from Bank of England??™s Monetary PolicyCommittee. Most traders believe the MPCwill lift the repo rate by +25bps to 5.75%. Data released in the U.K.today saw the June construction sector PMI survey improve while REC reportedJune wage pressures remained elevated. Cable bids are cited around the US$ 2.0090 level. Theeuro came off vis-? -vis the British pound as the single currency testedbids around the ?‚¤0.6740 level and was capped around the ?‚¤0.6755 level.

SWISS

The Swiss franc came off vis-? -vis the U.S. dollartoday as thegreenback tested offers around the CHF 1.2175 level and was supported aroundthe CHF 1.2090 level. Technically,today??™s intraday high was right around the 61.8% retracement of the move fromCHF 1.1995 to CHF 1.2475. Data releasedin Switzerlandtoday saw June consumer prices up 0.1% m/m and 0.6% y/y, relatively tameinflation data that diminish the chances Swiss National Bank will move interestrates higher before their next scheduled meeting in September. The most likelyscenario remains a +25bps monetary tightening in September even though consumerprices are within the central bank??™s target zone for price stability. Dollar offers are cited around the CHF 1.2235level. The euro and British pound moved higher vis-? -vis the Swiss francas the crosses tested offers around the CHF 1.6555 and CHF 2.4530 levels,respectively.

CURRENCIES: Sterling Stays Well Above $2 Mark

The dollar failed to recover against the British pound on Tuesday, as market participants were nonplussed by data showing declines in pending-home sales and a smaller-than-expected drop in factory orders.

Instead the market remained focused on expected rate hikes in the U.K. and the euro zone, and speculation that the U.S. could cut rates.

"The market is broad in a sell-dollar mode," said Michael Cairns, trading desk manager at FX Solutions.

The pound last traded at $2.0166 against the dollar. The sterling had reached a 26-year record high in late New York trading, touching $2.0195 at one point.

Meanwhile, the dollar was up 0.1% at 122.35 yen, and down 0.5% against the euro at $1.3613.

The U.S. housing market weakened further in May, with contract signings on sales of previously owned homes falling 3.5%, the National Association of Realtors reported.

Pending sales are down 13.3% compared with a year earlier and are down 21% from the peak year in 2005. Pending-home sales represent home sale contacts that have originated but have not yet closed.

After three straight gains, orders for U.S.- made factory goods fell 0.5% in May, the Commerce Department estimated.

Economists had been looking for a drop of about 1.2% in factory orders, according to a survey conducted by MarketWatch.

Although that report beat expectations, traders remained unconcerned about the figures.

It would be "a stretch" to say that traders were focusing on factory-goods numbers, according to Vassili Serebriakov, an economist for 4Cast, a financial market analysis company.

Housing data still is a big mover, Serebriakov added.

"The [housing] numbers were softer than expected, which just adds to U.S. dollar worries," Serebriakov said. "However, the market already is probably quite short the U.S. dollar going into the holidays, and I would not expect a significant downside from here into tomorrow's Independence Day."

Partially due to strong U.K. housing data, the Bank of England is expected to raise rates by a quarter-point to 5.75% at its Wednesday meeting, according to the consensus on Wall Street.

If the bank's statement is dovish, the currency market could see some selling, Cairns said. "The pound has held up very well since Friday [and] traders have an exceptional amount of appetite for risk in the market."

Meanwhile, the European Central Bank is expected to lay the groundwork for at least two more rate hikes at its Thursday meeting. Last week's euro-zone data, which included a 25-year low unemployment figure in France and high consumer confidence index, might contribute to the ECB's hawkish demeanor.

Bank President Jean-Claude Trichet could again use the codeword "vigilant" to suggest that there might be more rate hikes in the pipeline, Cairns said.

Meanwhile, the yen gained a bit on the dollar Tuesday, but stood still against most other major currencies, indicating that investors practicing the carry trade still felt quite comfortable. The trade refers to the borrowing of low-yielding currencies to invest in higher yielding assets.

Although the yen and dollar might look better today, dollar levels against the pound, euro and others have remained largely unchanged.

Meanwhile, because there already were European rate hike expectations built into currency prices last week, the catalyst for this week's slide in the dollar could be due to "sanguine expectations" built into U.S. dollar-denominated risk assets, along with developments on the subprime front, according to Naomi Fink, directory of foreign exchange strategy at BNP Paribas.

"I think that we're very, very far from pricing in [the subprime problems]," Fink added. "It's anyone's guess what the full extent of a potential contagion might be."

The rise in default rates and delinquencies still remains contained for now to the sector, Fink said. However, she said she is not convinced that the problems won't spill over.

The Independence Day holiday might see some significant shifts in the market, as investors take advantage of the lower volume of trades.

Fewer participants around the holidays creates higher volatility in the markets, allowing a small group of traders to push currency movements up with large sells and purchases.

(END) Dow Jones Newswires

03.07.2007 - Producer prices rose by 0.3% in the euro area in May

The producer price index in the euro area rose in May by 0.3%, which was up to analysts’ estimates (0.3%), but slightly below the preceding reading (0.4%).

In May 2007, compared with May 2006 producer prices increased by 2.3%, which was below economists’ expectations (2.4%). In April annual producer price index was 2.4%.

Producer prices excluding energy sector rose in May by 0.4% compared with the previous month, and by 3.2% compared with May 2006. Prices in the energy sector increased in May by 0.5% compared with the previous month and fell by 0.5% toward May 2006.