Weekly ActionForex (Jan 25-29): More Upside for US in Feb Undenied?

January turned out to be a month dominated by risk aversion as we've seen broad based selloff in yen crosses.

• Euro was hardest hit on concern in Greece's fiscal heath, with EUR/JPY down -6.45%.
• New Zealand dollar was secondly worst performer after disappointment inflation data and was down -6.39% in January.
• Even the relatively resistance AUD/JPY, which was supported by strong data from Australia, was down -4.61%.

A couple of factors, including sovereign rating concerns in some countries in Eurozone, more tightening measures from China and US Obama's bank plans would continue to weigh on market sentiments going forward.

We'd like to point out the bearish January reversal in US stocks. DOW edged higher to 10729 earlier in the month but then dropped sharply to close at 10067, which is way below December's low of 10235. That is a very clear sign of topping and we'd probably start to see more position unwinding in the rest of Q1.

Dollar's reaction to US data will be tricky and we should look through the initial reactions but focus on intermarket relations to determine the underlying force. Just like Friday's Q4 GDP which showed a strong rise of 5.7% annualized. The ultimate reaction was that DOW was down -0.52% on Friday which in turn lifted dollar and yen.

The January FOMC statement showed slightly more hawkish tone on economic growth though the overall stance remained unchanged – the Fed funds rate will be kept at 0-0.25% and 'economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period'. Kansas City Fed President Thomas Hoenig's dissent to keep the 'extended period' phrase was also surprising and signaled there might more hawks appearing later this year.

Euro continued to be weighed down by concern on Greece and possible contagion effects. In particular, Germany and France denied a report of an imminent EU bailout of Greece and sent Greece CDS up to 414 record 414 level which was the same as Dubai's CDS when it got a $10b bailout in December. The yield on 10-year Greek bonds rose to as high as 7.15 percent , the highest level since October 1999 and up from 4.99 percent on Nov. 30. Euro will likely remain pressured against dollar and yen on this issue. Nevertheless, the decline against Swissy and Sterling look a bit stretched. Indeed, Friday's sharp rebound in EUR/CHF argues that SNB might start to intervene again after EUR/CHF approaches 1.45 level.

Sterling, on the other hand, was somewhat supported by Hawkish comments from BoE Sentance. It's likely that BoE will pause the quantitative easing program this week. However, the path ahead is still very unclear considering that recovery in UK is still very weak. We're talking about a mere 0.1% qoq expansion in Q4 in UK's GDP which suggests that there are still much risk of returning into recession. It should be just a matter of time when Sterling catches up with weakness of other European currencies.

Looking at the charts, as mentioned before DOW's single month reversal in January is definitely a sign of topping after it fails to sustain above 55 months EMA. It's still a bit early to conclude whether whole medium term rise from 6496 has completed, but near term weakens in anticipated in any case and further fall should be seen towards 38.2% RETRACEMENT OF 6569.96 TO 10729.89 AT 9102.6.

Another point to note is that CRB commodity index might have topped in 293.75 on bearish divergence condition in daily MACD, after failing 100% projection level of 297. The sharp break of the trend line support should have already set the stage for deeper fall to 213.2 support level going forward.

The above developments is inline with the bullish view on dollar.