10:00AM US July Existing Home Sales (exp 6.55m, prev 6.62m) 07:50PM Japan July Trade Balance (exp 725 bln yen, prev 613 bln yen)

The dollar failed to retain the gains achieved on Tuesday against the euro as the market began to worry about the U.S. housing data due later. The U.S. existing home sales is expected to decline in August, and thus may reinforce the expectation that the Fed will not lift interest rates any more.

Chicago Fed President Michael Moskow said on Tuesday that more rate hikes may be needed to keep prices in check. The dollar was pushed higher slightly on his speech, but it is still widely expected that the Fed will hold the interest rates unchanged on its September policy meeting.


Euro Fell on Disappointing Germany ZEW

The euro fell against the dollar on a disappointing Germany report released on Tuesday. The euro dropped from 1.2870 by almost 1 cent to nearly 1.2780 against the dollar. German ZEW economic sentiment dropped from July¡¦s 15.1 reading to 5.6 in August, well below the forecast for 11.4. The disappointing figure marked the seventh straight month of declines of the business climate in Germany. The ZEW institute said that its survey pointed to a ¡§considerable economic downturn¡¨ over the next six months. The report reflected concerns about the higher interest rates and the higher taxes that begin in 2007.

However, the ZEW figure is not able to change the market expectation that the ECB will raise rates further. ECB Governing Council member Axel Weber said on Tuesday that the ZEW indicator was just one economic measure among many. He added that the ECB would keep raising rates as long as the economic growth prospects and price risks continued to rise. We will look to the German IFO index due on Thursday to further gauge the euro zone economy outlook.

EURUSD will face key resistance at 1.2840 and 1.2880. Additional ceilings will emerge at 1.29, backed by 1.2940, 1.2970 and 1.30. Support starts at 1.28 and 1.2780. Subsequent floors are eyed at 1.2750, followed by 1.27, 1.2670 and 1.2650.


Yen May Rebound

According to the Washington-based Commodity Futures Trading Commission, the number of net yen shorts was 62,274 on Aug. 15, up from 51,791 in the previous week. Given the significant short yen positions, the yen may rebound on some short-covering later.

The yen may also rebound as the traders may sell EURJPY below the 150 level to defend options that will become worthless once the euro break the 150 key level versus the yen.

USDJPY will target key resistance at 116.40, followed by 116.80 and 117. Further gains will encounter additional ceilings at 117.40, followed by 117.70 and 118. Support begins at 116, backed by 115.80 and 115.50. Additional floors are seen at 115.30, backed by 115.

05:00AM E-12 Germany August ZEW Economic Sentiment (exp 11.4, prev 15.1) E-12 June Industrial Orders (exp -0.6%, prev 2.3%) 07:00AM Canada July core CPI y/y (exp 1.9%, prev 1.7%) Canada July CPI y/y (exp 2.0%, prev 2.5%) 07:50PM Japan June all-industry index m/m (exp 0.1%, prev -0.2%)

The euro slid from a three-month high versus the dollar on light profit taking on long positions that had accumulated as the ECB’ rate hike outlook appears to be much brighter than other central banks’. The euro broke a previous key resistance at 1.2910 against the dollar yesterday, but stopped at 1.2940. Given the market positioning, there is still a risk of additional euro long position unwinding.

The dollar also gained after Iran said it will today reject a United Nations resolution and continue enriching uranium. The UN Security Council has given Iran until Aug. 31 to accept the EU-led proposal of incentives and suspend uranium enrichment, or face the threat of economic sanctions. Rising geopolitical risks caused the investors turn to relatively safer assets, such as U.S. Treasuries, which pushed the dollar higher.

Without an U.S. economic data, the market will focus on the euro zone data today. German ZEW economic sentiment due later is expected to drop to 11.4 in August from July’s 15.1 reading. If it does fall, that would mark the seventh straight month of declines of the business climate in Germany.

The market will also look to the Fed officials speeches today. Atlanta President Jack Guynn and Bank of Chicago President Michael Moskow are likely to indicate cooling economy will curb inflation, dampening expectations of further interest-rate hikes. The gain in the dollar may be limited by their speeches.

EURUSD will face key resistance at 1.2890 and 1.29. Additional ceilings will emerge at 1.2910, backed by 1.2940, 1.2970 and 1.30. Support starts at 1.2850 and 1.2820. Subsequent floors are eyed at 1.28, followed by 1.2780, 1.2750 and 1.27.

The euro hovers near the record high against the yen on expectations that the European Central Bank will keep its credit tightening pace. EURJPY will target key resistance at 149.70, followed by the key psychological resistance at 150. This pair is likely to break this level sooner or later. Support begins at 149.40, backed by 149.20 and 149. Additional floors are seen at 148.70, backed by 148.50.

USDJPY rises as the Iran event caused the investors seek the safety in the dollar-dominated assets. This currency pair will target key resistance at 116.20, followed by 116.50 and 116.80. Further gains will encounter additional ceilings at 117, followed by 117.40 and 117.70. Support begins at 116, backed by 115.80 and 115.50. Additional floors are seen at 115.30, backed by 115.

05:00AM E-12 June Trade Balance (exp -1.2 bln euros, prev -0.9 bln euros) 08:30AM Canada June Retail Sales m/m (exp 0.2%, prev -0.6%) Canada June Retail Sales ex-autos m/m (exp 0.3%, pre -0.2%)

The euro gains across the board on expectations that the European Central Bank will keep its credit tightening pace. The euro refreshed the record high against the yen at 149.01.

The interest rate outlook is still one of the main drives of the FX market. The euro is clearly now the favorite among traders. However the gain in the euro may be limited by this Thursday¡¦s German IFO business climate index, which is expected to fell in August.

The greenback slid against the euro and the yen after the University of Michigan consumer confidence on Friday fell, reinforcing the view that the U.S. economy is cooling.

It is widely expected that the Fed will hold its interest rates at 5.25% on September¡¦s policy meeting. The interest-rate futures showed traders see around 50% chance the Fed will lift its benchmark rate to 5.5% by year end.

A series of U.S. data due this week are expected to fell from the previous period, adding the selling pressure on the dollar. The U.S. existing home sales is expected to fell to 6.55 million in July from the June¡¦s reading of 6.62 million. New home sales is forecasted to decline to an annual rate of 1.1 million in July from 1.131 million in the previous month. The durable goods orders is likely to decline 0.3% in July, down from the 2.9% gain in June.

Besides, the Fed Chairman Ben Bernanke will give a speech on Friday.

EURUSD will face key resistance at 1.2890 and 1.29. Additional ceilings will emerge at 1.2910, backed by 1.2950, 1.2970 and 1.30. Support starts at 1.2860 and 1.2820. Subsequent floors are eyed at 1.28, followed by 1.2780, 1.2750 and 1.27.


China Raised Rates

The People¡¦s Bank of China lifted the one-year lending rate 27 basis point to 6.12% and the one-year deposit rate by the same amount to 2.52% on Aug. 18. China¡¦s rate increase will attract more capital flowing into the nation, helping the yuan appreciate. The yuan was pushed up to 7.9680 against the dollar on Monday, close to the high at 7.9650 reached earlier this month. As a trading proxy to the yuan, the yen is likely to be supported by the speculation the yuan will strengthen.

USDJPY will target key resistance at 115.80, followed by 116 and 116.30. Further gains will encounter additional ceilings at 116.70, followed by 117 and 117.40. Support begins at 115.50, backed by 115.30 and 115. Additional floors are seen at 114.60, backed by 114.

09:45AM US August University of Michigan Consumer Confidence (exp 84.0, prev 84.7)

The dollar steadies after it rallied on the robust U.S. manufacturing data. The Federal Reserve Bank of Philadelphia reported that its business conditions index rose to 18.5 in August from the 6.0 reading seen in July, well above the market forecast for 8.0. Some short dollar positions were covered after the strong report release, and thus the dollar gained against the euro and the yen.

The dollar had fell for three days after the weak CPI and housing data boosted the market expectation that the Fed may hold its interest rates at 5.25% on September meeting. Thought the interest-rate futures showed traders still see around 50% chance the Fed will lift its benchmark rate to 5.5% by year end, the fact that the economy is slowing down indicates the Fed is near the end of the tightening cycle.

The University of Michigan consumer confidence survey due Friday is likely to place downward pressure on the dollar. It is expected to show the confidence index fell from 84.7 in July to 83.8 in August.


Euro Shrugged off Soft CPI

The eurozone inflation data released on Thursday did not affect the market significantly. The eurozone July CPI fell from 2.5% to 2.4%. The core CPI, excluding food and energy costs, is unchanged at 1.4%, below the forecast for an increase to 2.5%. Though the data were not as strong as the forecasts, they did not change the market expectation of the ECB credit tightening outlook. This is the straight 18th time that the CPI annual rate is above the ECB¡¦s comfort zone, which is supposed to be at or blow 2%. The ECB is still widely expected to lift its borrowing costs twice by year end.

EURUSD will face key resistance at 1.2840 and 1.2880. Additional ceilings will emerge at 1.29, backed by 1.2910, 1.2970 and 1.30. Support starts at 1.2810 and 1.28. Subsequent floors are eyed at 1.2770, followed by 1.2740, 1.27 and 1.2670.


Sterling Fell on Retail Sales

The UK retail sales unexpectedly fell 0.3% in July, far below the forecast for a 0.2% increase. The weaker-than-expected figure pushed the cable down from 1.90 to 1.8970 versus the dollar, while the euro rallied refreshed the 2 week high against the cable at 0.6790.

The BoE minute showed a 6-1 vote in favour of the surprise rate raise to 4.75% in the Aug 3 policy meeting. From the wording of the statement, we could tell that the BoE is not likely to start a tightening cycle or lift rates again in the near future.


Yen Falls on North Korea¡¦s Test

The yen fell to a record low at 148.90 against the euro on the news that North Korea may be preparing an underground test for nuclear bomb. Recall that North Korea fired seven missiles on July 5, pushing the yen fall against the euro. Since the suspected test has not been materialized, the yen decline should be short lived.

It should be noted that the euro faces a downside risk because of its current significant long position.

EURJPY will target key resistance at 148.85, followed by 149 and 149.30. Further gains will encounter additional ceilings at 149.70, followed by 150. Support begins at 148.60, backed by 148.20 and 148. Additional floors are seen at 147.70, backed by 147.30.

The major currency pairs continue to be largely driven by economic data, with the sterling moving lower today after the release of a UK retail sales report. The dollar also bounced back from earlier weakness as a result of a much stronger-than-anticipated Philadelphia Fed survey in the New York afternoon. The greenback recovered from its lows versus the euro just shy of the 1.29-level back toward the 1.2820-mark.

US economic data released on Thursday included weekly jobless claims and the Philadelphia Fed survey. The weekly jobless claims improved by more than expected at 312k and down from 319k a week earlier. Meanwhile, the Philadelphia Fed survey was sharply higher than forecast, triggering a drop in US Treasuries and gains in the dollar. The Philly Fed survey rose to 18.5 for August blowing away estimates of a slight improvement to 8.0 and up sharply from the previous month at 6.0.

The data for Friday is limited to the August University of Michigan consumer confidence survey. Economists are forecasting the survey to slip slightly to 84.0 in August and down from July at 84.7.

Sterling Slides on Data

The sterling fell after a UK retail sales report disappointed market expectations. Retail sales fell 0.3%, its first decline in six months and shy of estimates for a 0.2% rise. Furthermore, the June report was downwardly revised to 0.7% from the initial 0.9%. The reports fuelled speculation of no further rate tightening from the Bank of England for this year.

Cable will encounter interim resistance at 1.89, followed by 1.8950 and 1.90. Additional ceilings are seen at 1.9040, backed by 1.9075 and 1.91. Support is eyed at 1.8820 and 1.88. Subsequent floors are seen at 1.8770, backed by 1.8730 and 1.87.

Eurozone Inflation Eases

Despite softer than expected Eurozone inflation numbers, the euro managed to stage a test of the 1.29-level in the Thursday session. Eurozone July CPI fell shy of estimates at 2.4% and down from 2.5% in the previous year. The core CPI figure was also lower than expected at 1.4%, lower than the 1.5% forecast and unchanged from a year earlier. The easing of inflation will likely play into the ECB’s next monetary policy decision and upcoming data will continue to be closely scrutinized.

Euro encounters interim resistance at 1.2840, followed by 1.29 and 1.2930. Subsequent ceilings are seen at 1.2980 and 1.30. Support starts at 1.28, backed by 1.2750 and 1.27. Additional floors are eyed at 1.2660, backed by 1.2620 and 1.26

04:30AM UK July Retail Sales m/m (exp 0.2%, prev 0.9%) 05:00AM E-12 July Industrial Production (exp -0.1%, prev 1.6%) E-12 July core CPI y/y (exp 1.5%, prev 1.4%) E-12 July CPI y/y (exp 2.5%, prev 2.5%) 08:30AM US Weekly Jobless Claims (exp 315k, prev 319k) 12:00PM US August Philadelphia Fed Index (exp 8.0, prev 6.0) 09:30PM Australia July RBA Bulletin

The dollar declined after a U.S. government report showed the inflation is weaker than expected.

The U.S. consumer prices index rose from 0.2% in June to 0.4% in July as expected. The core CPI, excluding food and energy costs, only rose 0.2%, below the 0.3% gain a month earlier. The core CPI is the Fed¡¦s favorable inflation measure. The unexpected soft figures led the investors cut bets on the Fed lifting rates again.

Besides, the U.S. housing data released on Wednesday were surprisingly weak as well. The building permits fell to 1.75 million in July from 1.869 million in the previous month. The housing starts slipped to 1.80 million, below the expectation of 1.81 million. The tame figures showed the housing market is cooling.

The Fed is likely to hold its borrowing cost at 5.25% on its Sept. 20 meeting, however, the possibility of resuming rate hike by year end has not yet been ruled out. Interest-rate futures showed traders are pricing in only 47% chance the Fed will lift its benchmark rate by 25 basis point to 5.5% by year end, down from 71% before the CPI report.

The University of Michigan consumer confidence survey due Friday is expected to show the confidence index fell from 84.7 in July to 83.8 in August. If this report also turns out to be weak, the expectations of another rate hike within year will be further dampened and thus the dollar will face more selling pressure.

Eurozone inflation report will be released later in the session. The eurozone July CPI is expected to remain above the ECB¡¦s comfort zone at 2.5% , and the core CPI up from 1.4 % to 1.5%. This inflation report is likely to support the euro.

EURUSD will face key resistance at 1.2880 and 1.29. Additional ceilings will emerge at 1.2920, backed by 1.2950, 1.2970 and 1.30. Support starts at 1.2850 and 1.2830. Subsequent floors are eyed at 1.28, followed by 1.2770, 1.2740 and 1.27.


EURJPY

The ECB is widely expected to raise rates two more times this year to 3.5%. By comparison, the policy meeting minutes indicated that the BoJ is likely to raise rates at a slower pace. The yen fell to 148.85 against the euro yesterday.

The euro held firm against the dollar and the yen. According to the Commodity Futures Trading Commission, the number of net euro longs was 92,108 on Aug. 8. It should be noted that the huge euro position suggests that it is possible for the euro to scale back.

EURJPY will target key resistance at 148.60, followed by 148.90 and 149. Further gains will encounter additional ceilings at 149.30, followed by 149.70 and 150. Support begins at 148.20, backed by 148 and 147.70. Additional floors are seen at 147.20, backed by 147.