European Mid Morning Update 27th March 2008

Latest news on European Mid Morning Update 27th March 2008

No change in sentiment

Since my last report a week ago there has been plenty of bluster but no real change in the underlying sentiment.

U.S. releases continue to be biased to the downside while European to the upside. Following the modest recovery after the Q4 slowdown Trichet appears to have the bit between the teeth in pushing a hawkish tone. Indeed, with the strong Q1 showing and inflation still at very uncomfortable levels so he should.

He was also very firm on quelling any suggestions that the ECB may raise the “definition” of price stability. “Absolutely not. It is our absolute inflexible determination to maintain that definition of price stability which is the key for delivering price stability,” he commented, maintaining that inflation must remain “below the 2% level.”

On the other hand Paulson provide little hope for house owners by stating that house prices need to fall further so that “more buyers return to the housing market, and housing will again contribute to economic growth.”

Thus we are left with a Dollar that is falling back towards its all-time lows. Whether it will penetrate is uncertain. The bearishness is there but the rally in the Euro has been so direct we may find that momentum may well slow and require a clear out of short Dollar positions before the eventual break.

Elsewhere the BOJ’s Suda has revealed some concern over the economy warning today of a greater risk of a stronger than anticipated slowdown in the economy with capital investment suffering a minor collapse. Next week’s Tankan report is also expected to provide a more bearish outlook.

Indeed, with inflation beginning to rear its head even in Japan, watch out for tomorrow’s CPI numbers which may well be slightly worse than expected following a number of price hikes announced at the beginning of March and more from next week. The hikes I have seen are mostly between 5% & 10% which may be on selected goods, but causing some concern. To counter that I have also seen foreign goods falling by the same amount reflecting the Yen’s strength.

Technically speaking, the first thoughts on my return is that there are quite a few apparent disparate signals across the board and it almost seems as if there is a general lack of correlation. At times I felt Dollar bullish and others bearish. It tends to indicate potential for the correction to lengthen in time and thus has less potential for a direct resumption of losses.

Overall the signals around the Dollar lows are not uniformly indicating a reversal. Indeed, the corrective levels achieved in Dollar-Yen and the Euro tends to suggest a further Dollar low at some point. On the daily charts there are Dollar bullish divergences against the Yen and the Swissie (just) but not against the Euro. However, Rapid RSI has moved lower in the Euro and it does warn of a potential set up for a reversal should we see a move to new highs that is not sustainable.

I can’t say that the Aussie and Euro-Yen have performed quite as expected but here the Aussie doesn’t look that strong to me while the Euro does look like dipping once again. The latter will need either Dollar-Yen or the Euro to bring it lower and I tend to fancy a bit of both – probably Dollar-Yen first.

So not entirely a clear picture at this point. All I can say is that it doesn’t look like the Dollar’s downside is quite complete yet but I do feel that over the coming month or so we should see a stronger reversal higher.

Today’s numbers should see the Dollar soften further but it seems unlikely that the Euro will push above the 1.5901 high.

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF       GBPUSD
Res: 100.32-49    1.5961-82    1.0023-64    2.0240-72
Res:   99.60-89    1.5857-00    0.9964-96    2.0110-43

Spt: 98.45-70 1.5724-45 0.9846-79 2.0012-27
Spt: 97.65-87 1.5650-60 0.9785-20 1.9949-66

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