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Dollar Closes at a Two Month High, Critical Bull Trend Within Reach

By , Chief Currency Strategist
15 May 2012 03:04 GMT
  • Dollar Closes at a Two Month High, Critical Bull Trend Within Reach
  • Euro Dives As Greek Confidence Falls Apart, Heavy Data Flow Ahead
  • British Pound Contradicts European Struggle, Is it a Safe Haven?
  • Japanese Yen Forges Fresh Gains as Equities Tags New Lows
  • Swiss Franc: SNB’s Jordan Keeps Up the Fight Against Market Doubts
  • Australian Dollar Follows Risk Trends, Not RBA’s Lowes Assessment
  • Gold Suffers Another Big Hit, 10-Month Low 1525 In Sight

Dollar Closes at a Two Month High, Critical Bull Trend Within Reach

Further progress towards deleveraging risky positions, rising volatility as the trend takes traction and a growing strain of the very framework of global financial markets is suiting the dollar well. Through the opening session of the new trading week, the greenback marked meaningful progress against the exceptionally liquid Euro as well as the risk-sensitive Australian dollar. Progress on both fronts could be argued to be as much weakness for the counter-currencies as much as it was strength for the dollar, but relative performance is the nature of the FX market. Through Monday’s close, the greenback advanced against all but the pound and Japanese yen, leading the Dow Jones FXCM Dollar Index (ticker = USDollar) to advance for the ninth time in eleven trading sessions. That count doesn’t give the full read on the benchmark’s performance. In less than two weeks, USDollar has surged 2.4 percent and set its highest close since March 14 – one step away from 10,100.

We have seen meaningful swings from the dollar before that have fallen short of the threshold that would prompt momentum to take over for a full-blown bull trend. Where the odds for follow through are better now is in the support from the fundamental backdrop. Like every other asset in the financial markets, the dollar is a beholden to the balance of risk and reward. Unfortunately for the dollar, the current yield is anemic and the outlook doesn’t look any better. That said, the ‘risk’ component actually plays to the greenback’s advantage. After today’s close, we find FX volatility is at its highest level in two months while the Dow Jones Industrial Average closed below two-month support. Things are heating up.

Euro Dives As Greek Confidence Falls Apart, Heavy Data Flow Ahead

Without doubt, the euro faces the greatest fundamental risk over the next 24 hours and beyond. The currency is already trying to cope with fears that Greece will soon have no option but to exit the Euro Zone and concern that Spain will quickly spread the financial pain via its banking system. Through this past session, we were reminded of the constant pressure that rests on the euro’s shoulders through headlines, polls and market confidence votes. From the headlines, it was reported that Greece once again failed to agree to a coalition government, prompting the president to call for further talks Tuesday. Oddly enough, comments from officials after the European Finance Ministers after their meeting Monday evening reported that the topic of a Greek exit was not discussed along with the warning that no alterations to the program would be entertained. And, as for the market’s confidence vote, we had both Spanish and Italian bond auctions drawing higher yields.

The stakes have been raised further for the Euro in the upcoming session. When it comes to the region’s financial troubles, policy officials have proven themselves to be quite adept at buying a little more time until the situation truly grows untenable. However, when there is clear evidence that hold outs will be delivered losses, the promise of a little more time doesn’t cut it. A deadline like a failed bond payment is the preferable crisis catalyst, but GDP readings are a good second. In the upcoming European session we are expecting advanced measures of Greek, Portuguese, French, German and Euro Zone first quarter growth. On aggregate, this will be a clear sign of how the region is managing the region’s financial crisis – and the forecasts for a mild recession will be our benchmark. However, we can take this a step further and compare the relative health of the periphery members to the core members. Beyond GDP readings, watch the bond auctions and EU comments.

British Pound Contradicts European Struggle, Is it a Safe Haven?

Despite a clear risk aversion move and distinct blow to the Euro-region’s financial health, the sterling managed to close a positive performance against every one of its liquid counterparts Monday. There has been discussion that the sterling is a regional safe haven – taking place of the manipulated Swiss franc. The pound certainly enjoys liquidity and isn’t stuck in the EZ’s financial construct, but it is far from a sound safe haven. We may not test that theory until Wednesday when the sterling faces its own fundamental risk: labor data and the BoE Quarterly Inflation report.

Japanese Yen Forges Fresh Gains as Equities Tags New Lows

With the S&P 500 and Dow Jones Industrial Average (stimulus supported indexes) slipping below support to two-month lows, the drive behind carry unwind has gained further momentum. Progress for the yen as a safe haven via its funding currency status has shaken out the uncommitted carry traders. To keep a risk-balanced pair like USDJPY moving, we need to up the ante and break down the civility of capital repatriation. That is a difficult scenario to work for USDJPY losses however given the dollar’s liquidity appeal.

Swiss Franc: SNB’s Jordan Keeps Up the Fight Against Market Doubts

There is little chance that the Swiss central bank will be able to talk its currency down – unless they start to discuss imminent plans to take more drastic actions. However, President Jordan’s reiteration of the group’s dedication to maintain their current policy of holding a EURCHF floor helps to fend off growing speculation that the SNB simply does not have the will to counteract a possible Euro crisis. Jordan mentioned the trouble the euro situation posed, the commitment to the floor and the economic reasoning to keeping up the fight.

Australian Dollar Follows Risk Trends, Not RBA’s Lowes Assessment

The RBA minutes released early this morning added little to the statement released after the central bank’s recent decision to cut its benchmark yield by 50 basis points. It was perhaps central bank member Lowe who took the least traveled path by saying he suspected the Australian dollar would remain high for years. Yet, that didn’t seem to deter the recent selling effort. The Aussie dollar dropped below its critical 1.0000 (parity) threshold against its US counterpart. With the 12 month rate forecast dropping and US equities taking out support, progress isn’t surprising.

Gold Suffers Another Big Hit, 10-Month Low 1525 In Sight

Another 1.4 percent plunge from gold ushered the precious metal to its lowest levels of the year. Having dropped 7 percent since the beginning of the month alone, this commodity is suffering a rapid decent. Given the level of the European financial crisis, it is clear that the standard safe-haven or basic anti-currency explanation simply doesn’t hold. The dollar is playing a critical role here and is close to marking another big break.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

EUR

Greek GDP n.s.a. (YoY) (1Q A)

-7.5%

Despite IMF projections of growth by 2013, Greek economy struggling with bleak growth prospects

1:30

AUD

Reserve Bank Board May Minutes

Markets expect further rate cuts, even after 50 bp move

5:00

JPY

Consumer Confidence (Apr)

40.8

40.3

Japanese consumer confidence on clear recovery path

5:30

EUR

French Gross Domestic Product (QoQ) (1Q P)

0.0%

0.2%

French economy expected to have stagnated in 1Q, partly on slower manufacturing

5:30

EUR

French Gross Domestic Product (YoY) (1Q P)

0.5%

1.3%

6:00

EUR

German GDP nsa (YoY) (1Q P)

0.9%

--

Germany expected to avoid technical recession, but pace of growth remains anemic as global slowdown dampens export activity

6:00

EUR

German GDP s.a. (QOQ) (1Q P)

0.1%

-0.2%

6:00

EUR

German GDP wda (YoY) (1Q P)

0.8%

--

6:45

EUR

French Non-Farm Payrolls (QoQ) (1Q P)

-0.2%

-0.1%

Unemployment in France at 12-year high

6:45

EUR

French Wages (QoQ) (1Q P)

0.7%

0.3%

8:00

EUR

Italian GDP sa and wda (QoQ) (1Q P)

-0.7%

-0.7%

Third consecutive quarter of contraction expected on austerity measures

8:00

EUR

Italian GDP sa and wda (YoY) (1Q P)

-1.2%

-0.4%

8:30

GBP

Visible Trade Balance GBP/Mn (Mar)

-£8400

-£8772

Trade deficit probably narrowed, but improvement may be short-lived on GBP strength

8:30

GBP

Trade Balance Non EU GBP/Mn (Mar)

-£4700

-£5017

8:30

GBP

Total Trade Balance (GBP/Mln) (Mar)

-£2900

-£3396

9:00

EUR

Euro-Zone GDP s.a. (QoQ) (1Q A)

-0.2%

-0.3%

European Commission expects Eurozone economy to contract 0.3% in 2012

9:00

EUR

Euro-Zone GDP s.a. (YoY) (1Q A)

-0.2%

0.7%

9:00

EUR

German ZEW Survey (Current Situation) (May)

39.0

40.7

Sentiment gauges resuming falls after gains earlier in 2012

9:00

EUR

Eurozone ZEW Survey (Econ. Sentiment) (May)

--

13.1

9:00

EUR

German ZEW Survey (Econ. Sentiment) (May)

19.0

23.4

9:00

EUR

Portuguese GDP (QoQ) (1Q P)

-1.0%

-1.3%

Negative print would be sixth consecutive quarterly contraction for Portugal

9:00

EUR

Portuguese GDP (YoY) (1Q P)

-3.1%

-2.8%

12:30

USD

Consumer Price Index (YoY) (Apr)

2.3%

2.7%

Generally projected to be soft as US economy exhibits signs of weakness

12:30

USD

CPI Ex Food & Energy (YoY) (Apr)

2.3%

2.3%

12:30

USD

Advance Retail Sales (Apr)

0.1%

0.8%

Weaker retail sales would mirror slowdown on labor-market

12:30

USD

Retail Sales Less Autos (Apr)

0.2%

0.8%

12:30

USD

Retail Sales Ex Auto & Gas (Apr)

0.3%

0.7%

12:30

USD

Retail Sales "Control Group" (Apr)

0.3%

0.4%

13:00

USD

Total Net TIC Flows (Mar)

--

$107.7B

13:00

USD

Net Long-term TIC Flows (Mar)

$32.5B

$10.1B

GMT

Currency

Upcoming Events & Speeches

7:00

EUR

EU Finance Ministers Continue Meeting in Brussels

8:00

EUR

French President-Elect Hollande Inaugurated

13:30

USD

Fed’s Duke Speaks in Washington

16:30

EUR

Germany’s Merkel Meets France’s Hollande in Berlin

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS & SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

16.5000

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.7166

1.8108

8.1913

7.7657

1.2590

Spot

7.0538

5.7955

5.9350

Support 1

12.5000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.2980

1.6234

80.61

0.9482

1.0125

1.0092

0.7869

103.87

130.14

Resist. 2

1.2942

1.6198

80.42

0.9453

1.0102

1.0059

0.7843

103.51

129.73

Resist. 1

1.2903

1.6163

80.24

0.9424

1.0078

1.0026

0.7816

103.16

129.32

Spot

1.2826

1.6091

79.86

0.9365

1.0032

0.9961

0.7763

102.44

128.51

Support 1

1.2749

1.6019

79.48

0.9306

0.9986

0.9896

0.7710

101.72

127.70

Support 2

1.2710

1.5984

79.30

0.9277

0.9962

0.9863

0.7683

101.37

127.29

Support 3

1.2672

1.5948

79.11

0.9248

0.9939

0.9830

0.7657

101.01

126.89

v

--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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15 May 2012 03:04 GMT