The story over the last 24 hours remains one of US dollar weakness and increasing risk appetite, despite continuing lacklustre US economic data.

The US ISM reported its manufacturing gauge fell to 55.5 in July from 56.2 in June; however some comfort was taken from the fact that the number came in better than the figure of 54 that economists had expected.

With Europe and the UK showing PMI improvements sentiment is shifting away from the US dollar, and into currencies like the Australian dollar, the pound and the Scandinavian currencies.

Meanwhile in a speech in South Carolina Federal Reserve Chairman Bernanke reiterated his concerns over the US economy, and his desire to keep fiscal policy fairly loose in the near term, saying that the US had some way to go to achieve a full recovery. As a result the US dollar index is now heading towards its 200 day moving average at 80.74, and possibly its 9th straight weekly decline.

If today’s US economic data continues to disappoint then we could well see further US dollar declines.

June personal consumption data is expected to increase by 0.1%, with personal spending at 0.1%, and personal income data at 0.3%, all due at 1:30pm.

At 3pm factory orders for June are expected to come in at -0.5%, while pending home sales are expected to rise by 4% in June, after May’s 30% shock decline.

The pound by contrast, has continued its meteoric rise higher on the back of manufacturing PMI for July yesterday, which came in at 57.3 instead of the 57 expected, sending sterling close to 11 month highs on its trade weighted index at 82.50.

Today’s UK PMI construction data for July should also continue to be supportive with expectations of 58, a slight fall from June’s 58.4.

In Australia today the Reserve Bank of Australia kept rates on hold at 4.5% as building approvals for June fell sharply by 3.3%, against expectations of an increase of 2%, while retail sales increased also less than expected at 0.2% against an expectation of 0.4%, prompting a fall in the Australian dollar as traders speculated that rates would not be rising again for the remainder of 2010.

EURUSD – the single currency finally reached the 1.3125 38.2% Fibonacci level. The subsequent break above this key area now opens up the possibility of a larger rise towards the 1.3510 area which is the 50% retracement level of the 1.5145/1.1880 down move.

Interim trend line support now comes in around 1.3030 from the 1st July lows at 1.2190/00. Below this we also have support around the 1.2950 level a break of which would open a test towards the 1.2840/50 level.

GBPUSD – the pound continues to push on breaking above the 1.5870 the 61.8% retracement level of the down move from 1.6880 to the May lows at 1.4230, and spilling over to 1.5908. The pound looks capable of extending these gains towards the February 3rd highs of 1.6070, however with momentum continuing to remain a touch stretched it could dip back towards the 1.5520/50 support area and 50% level in the near term. Long term trend line support levels, remain around the 1.5320/30 area, from the June lows at 1.4350.

EURGBP – the break below the head and shoulders neckline at 0.8315, and the 50% retracement level at 0.8300 of the up move from 0.8065 to the 0.8520 double top, opens up a test of 0.8245, the 61.8% retracement level, and back towards the lows at 0.8070, while 0.8410 caps. Resistance should also be found around the old neckline support around the 0.8315/20 level.

USDJPY – despite the new spike low last week at 85.95, progress towards last years yen highs at 84.80 remains remarkably slow. The support level around 86.25 seems to holding on a daily close but rallies seem restricted to the 87.00 area for now.

While the dollar is unable to overcome the bigger 88.00/10 level the focus remains solidly on further yen gains in the short term.

Pressure on the Bank of Japan with respect to monetary policy will only intensify if we break below the 84.80 area, which would then look to target the 1995 lows below 80.00.

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Article by James Hughes, Analyst, CMC Markets.

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