Mid-Day Report: Euro, Sterling Lifted by PMI; Yen Mixed Post BoJ

Euro is lifted by expected upward revision in PMI services today. The index was revised up from initial reading of 53.6 to 54.1, which suggests better strength in the economic recovery. Though, gain is limited so far as the news was offset by a weak retail sales report which came in at -0.4% mom, 0.6% yoy. Also, there were concern on the Eurozone debt situation after Moody’s said that Ireland’s Aa2 rating would be cut one notch considering the huge EUR 50b pledge to save the banking sector. On the hand hand, Sterling is also mildly firm after PMI services unexpected improved to 52.8 in September.

The Japanese yen is mixed today. BoJ accelerates its easing policy as economic outlook deteriorates. The central bank cuts the collateral overnight call rate to 0-0.1% from 0.1% and decides to create a 5 trillion yen fund to buy government bonds and other asset. The fixed-rate credit program is unchanged at 30 trillion yen. Policymakers forecast the pace of economic improvement in the country will slow for some time before returning to the moderate recovery path. Japanese yen declined against the dollar and the euro after the announcement. The 10-year bond yield also plunged to the lowest level to 7 years. More in BOJ Accelerates Easing Measures: Lowering Rates and Buying Assets.

Australian dollar is soft after RBA left rates on hold. Selloff in Aussie suggests that investors are obviously disappointed by the RBA’s decision to keep the cast rate unchanged at 4.5%. Given the hawkish comments from policymakers over the past weeks, the decision caught the market by surprise. Recent soft data probably made the central bank more cautious in implementing tightening. We retain the view that one more hike will take place in the fourth quarter whereas the timing will be data-dependent. More in RBA Leaves Rate At 4.5%, Aussie Slumps.

Other data released today saw Australian retail sales rose 0.3% mom in August, below expectation of 0.4%. Trade surplus widened more than expected to AUD 2.35b in August. Swiss CPI was flat mom, rose 0.3% yoy in September, inline with consensus. Focus will turn to US ISM non-manufacturing index.

Dollar index’s break of 78.04 suggests that recent down trend has resumed. Weakness in dollar also drives gold to new record high of 1329.6 today. Near term outlook remains bearish as long as 78.68 resistance holds. Current decline from 83.56 is viewed as part of the whole medium term fall from 88.70 and should target long term trend line support (now at 75.86) or even further to 100% projection of 88.70 to 80.08 from 83.56 at 74.94.

Daily Pivots: (S1) 1.3632; (P) 1.3718 (R1) 1.3770; More.

EUR/USD’s break of 1.3791 suggests that recent rise has resume after brief consolidations. Intraday bias is back to the upside and further rise should be seen towards 100% projection of 1.1875 to 1.3330 from 1.2587 at 1.4024, which is close to 1.4 psychological level. Nevertheless, considering mild bearish divergence condition in 4 hours MACD, break of 1.3636 support will indicate that a short term top is formed and bring deeper correction first.

In the bigger picture, price actions from 1.6039 is a correction to long term rally from 0.8223 and could have finished with three waves down to 1.1875 already. Short term outlook will remain bullish as long as 1.3 psychological level holds and further rally should be seen to upper trend line resistance (1.6039, 1.5143, now at 1.4600) next. Break there will target a new high above 1.6039.

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