USD/CHF
Slower Manufacturing Spells Dollar Doom: Data was mildly disappointing in the world's largest economy today as manufacturing activity was shown to have slowed in the month. According to the Institute for Supply Management, activity slowed to a reading of 54.2 against expectations of 57.5. With construction spending additionally rising less than expected by 0.2 percent for the month, greenback traders were absent on the session as bears pushed the underlying lower on expectations that the Fed will favor a rate cut in the near term. Sentiment remains that although Fed policy makers will raise rates one more time, considerations of a cut will run deeper as the activity data may be the start of a downtrend in productivity, dollar bearish. Dollar selling also ensued on increasing speculation that the Fed's minutes during the afternoon would boast a more dovish tone
Technically Speaking: Breaking through thick consolidation, the USDCHF currency pair has penetrated the lower trendline and steadfastly approaches the December 18th low at 1.2881. However, with current momentum waning, bears may be exiting in the short term setting up a prime retracement back to at least 1.3007 (38.2 percent fib from the intersession bear wave). With a formidable barrier at 1.3043 (50 percent fib) the trap may be set for a decline to the December 14th spike low of 1.2774.
EUR/USD
Fed Indecision Strengthens Bears: Although not blatantly dovish, the afternoon's Fed statements showed indecision among the policymakers even after a unanimous vote to raise rates another 25 basis points to 4.25 percent. The minutes continued the theme that further rate hike consideration would depend widely on economic factors currently present in the country. The report also went on to state "committee members generally anticipated that policy would likely need to be firmed further going forward" however, would "depend to an increased extent on the implications of incoming economic data." Further lending to bearish selling was speculation on 2006 growth estimates. The world's largest economy is set to dip below the 4.1 percent growth average seen in the past 3 years and expand at an annualized 3.6 percent rate. This would likely keep further rate hikes on the sideline as inflation is maintained at the target 3.1 percent rate.
Technically Speaking: Inverse of the USDCHF action, the EURUSD has bounced from the December 30th spike low of 1.1798 to reach highs not seen since earlier in December 2005. However, the aforementioned highs look to pose a considerable barrier and suggestive of a near term retracement opportunity. Much like the Swiss currency pair, the trap should be set with a top bottom at 1.1934 (38.2 percent fib from the intersession bull wave). Any downside breaks would meet formidable support floors at 1.1881 (78.6 percent fib from the wave).
GBP/USD
Productive Uptick In The UK: Helping along the British pound on the session was a manufacturing report released by the Chartered Institute of Purchasing & Supply. According to the CIPS report, manufacturing in the U.K. economy turned upward for the fifth consecutive month. Companies have now increased their efficiency and productivity in addition to winning more orders on domestic soil. As a result, suggestive of a stay on rate cut notions as the output environment has changed, the underlying currency looks to be buoyed after the slaughterfest seen at the tail end of 2005. Coupled with a bottom in housing price valuations, a slight up tick in the fourth quarter, the report adds to temporary euphoria over pound strength.
Technically Speaking: Hovering the previous resistance ceiling at 1.7454, the GBPUSD currency pair looks ripe for a retracement. Primary floors of support are held at 1.7386 (23.6 percent fib from the intersession bull wave) and 1.7337 (38.2 percent fib level from the intersession bull wave). The correction would indeed be temporary till upward directional bias resumes towards a test of 1.7600. Downside options include a test of the double bottom floor just above 1.7150.
Richard Lee is a Currency Strategist at FXCM.
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