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Dollar Wins its Highest Close Since January 2011, Buckle Up

By , Chief Currency Strategist
16 May 2012 03:12 GMT
  • Dollar Wins its Highest Close Since January 2011, Buckle Up
  • Euro: GDP Readings Beat Forecasts, Outlook Still Painful
  • British Pound Looks for a Return to Volatility on BoE Report
  • Japanese Yen Assess the Potential Impact for 1Q GDP
  • Australian Dollar Rallies Against All but the Greenback
  • New Zealand Takes a Hit Across the Board
  • Gold: Do or Die Time at Serious Support

Dollar Wins its Highest Close Since January 2011, Buckle Up

Considering benchmark pairs like EURUSD and AUDUSD were already forging serious headway in their dollar-bullish trends, it was only a matter of time before the Dow Jones FXCM Dollar Index finally made the mark of real progress. That score was made with Tuesday’s close as the Dollar Index stamped its daily bar at 10093 – the highest close for the benchmark since January 12, 2011. On this basis alone, it looks like we have crossed a significant threshold of sentiment whereby bullish interests can finally build momentum. However, both technical and fundamental traders should see the need for caution in moving too hastily on moving full tilt behind the dollar.

For the technical trader, the close at this height is certainly significant; but making it to the vicinity of consistent 10,100-resistance does not guarantee follow through. Bulls learned that lesson back in March when on the 14th of the month, the greenback set its highest close since the previous October but ultimately failed to capitalize on the move. To make that critical transition from breakout to follow through – which seems so tantalizingly close – is the right fundamental encouragement. There is little doubt that the dollar has gained a lot of ground under its own power, but it has also capitalized on the weakness of counterparts to get to this point. After the exceptional run that has already been put in (the USDollar Index is up over 280 points from its swing low at the beginning of the month), the dollar needs to generate its own power.

To leverage a true bull trend, the greenback has one of two options – become more competitive on a return basis (not likely given the Fed’s stance on rates) or play to the benchmark’s absolute safe haven status. For this, I keep switching back and forth between the Dollar Index and S&P 500 charts. One of the benefactor of absolute liquidity demand and the other is the stimulus-fortified representation of passive growth investment. We need to tip that balance on underlying sentiment. That said, our biggest catalyst to this point for risk aversion may start running out of steam. The European crisis is progressing, but the tangible deteriorate may ease somewhat as the next milestones in the slow motion crash could be further down the road (more on that below). If the market strains its eyes, perhaps a ‘no QE3’ read from the minutes will do.

Euro: GDP Readings Beat Forecasts, Outlook Still Painful

We have cleared another wave of critical event risk for the Euro. Looking at the aftermath of the euro’s performance, it should seem obvious how the data was interpreted; but some may still be confused. Didn’t many of the 1Q GDP readings for the Euro Zone end up beating their respective forecasts? Indeed, they did. If the general tone for the capital markets were one of optimism, a beat on these important economic readings could have offered a boost; but that is not the hand we have been dealt. Fear reigns and bears are in charge. Though the Euro Zone, German, French and Portuguese GDP readings managed to meet or beat their respective projections; they are all still on a downward trajectory – and 2Q isn’t shaping up so well. Nevertheless, we have passed this threat for now, and we won’t have growth updates for some time. Furthermore, the time frame for a second Greek election is a ways out while Spain’s financial troubles seem to be on ice after a nationalization and mass cajas merger. The euro is already limping, so it wouldn’t take much of a push to drive the euro again. That said, we still need a push.

British Pound Looks for a Return to Volatility on BoE Report

The sterling has held out against the storm of many different fundamental waves thanks to its separation from the immediate Euro Zone troubles as well as its ambiguous monetary policy bearing. That stability is already starting to breakdown however. This past session, the pound tumbled against the dollar as Euro-region fears started to trickle through the EU lines. The upcoming session my find the sterling determining its own future. The shift from unwavering BoE dove Posen not long ago was influential enough to keep the currency on a bullish track even through the news of a double dip recession. That good will may be at risk though with the upcoming Quarterly Inflation report. Watch for dovish forecasts.

Japanese Yen Assess the Potential Impact for 1Q GDP

Though Asian equity benchmarks were extending their bear trends beyond merely ‘catching up to the US market’s decline’, the Japanese yen was still showing losses against the US dollar, euro and even Australian dollar early Wednesday morning. This carry unwind pause could be a leading sign that risk trends could level off; but regardless, the timidity to the move won’t last. Early tomorrow morning Tokyo time, yen and equity traders should watch for the impact from the Japanese 1Q GDP reading. Is the world’s third largest economy keeping up its corner.

Australian Dollar Rallies Against All but the Greenback

It was an interesting development. Despite the distinct risk aversion drive through Tuesday’s session, the Australian dollar managed to advance against all but the most extreme safe haven (and possibly still undervalued) – the US dollar. Clearly, risk trends hadn’t improved to give the currency a yield advantage on the day. Perhaps this is a sign that we have found a level for the Aussie dollar that fully reflects the negative interest rate expectations moving forward. That doesn’t mean the decline is over – it would just require a heavy risk aversion flow.

New Zealand Takes a Hit Across the Board

The exact contrast of its Australian counterpart, the New Zealand dollar tumbled against every one of its most liquid counterparts. If we run on the same background information as its high-yield comrade, we know risk trends were still retreating. Yet, where the Aussie dollar has numbed itself to more restrained carry deleveraging efforts, the New Zealand currency is still exposed as its own interest rate outlook is still attempting to hang on to its neutral/hawkish outlook. Keep an eye on rate forecasts, which now price in a 42 percent chance of a 25bp cut next meeting.

Gold: Do or Die Time at Serious Support

A third consecutive decline (and the ninth in the past 11 active trading sessions) has ushered gold down to another critical level. Having broke the trendline that kept the metal in a comfortable bull trend for three years last week, we are now upon the 1550/25 zone of support going back to July. To break a level of this magnitude, we need to see serious dollar or liquidity interests that circumvent the metal’s safe haven status.

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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

0:30

AUD

Westpac Consumer Confidence s.a. (MoM) (May)

--

-1.6%

Australian unemployment rate unlikely to hold at current 4.9 percent as slowdown in non-mining sector of economy affects wages, consumer activity

0:30

AUD

Westpac Consumer Confidence Index (May)

--

94.5

1:30

AUD

Wage Cost Index QoQ (1Q)

0.8%

1.0%

1:30

AUD

Wage Cost Index YoY (1Q)

3.5%

3.6%

8:00

EUR

Italian Trade Balance (Total) (Euros) (Mar)

--

-1113M

Exports unlikely to provide significant support to economy in 4th recession in 2001

8:00

EUR

Italian Trade Balance EU (Euros) (Mar)

--

439M

8:30

GBP

Jobless Claims Change (Apr)

5.0K

3.6K

Bleakness on UK labor market to continue on ongoing government austerity, double-dip recession

8:30

GBP

Average Weekly Earnings 3M/YoY (Mar)

1.0%

1.1%

8:30

GBP

ILO Unemployment Rate (3mths) (Mar)

8.4%

8.3%

9:00

EUR

Euro-Zone CPI - Core (YoY) (Apr)

1.5%

1.6%

ECB generally sees inflation in Eurozone converging to 2 pct target

9:00

EUR

Euro-Zone CPI (YoY) (Apr)

2.6%

2.7%

9:00

CHF

ZEW Survey (Expectations) (May)

--

2.1

9:00

EUR

Euro-Zone Trade Balance s.a. (Mar)

3.8B

3.7B

Economic slowdown worldwide, especially China, could affect exports in medium term

9:00

EUR

Euro-Zone Trade Balance (Mar)

4.0B

2.8B

9:30

GBP

Bank of England Inflation Report

Markets to scrutinize closely to gauge extent of MPC’s “hawkish” turn.

12:30

USD

Housing Starts (Apr)

685K

654K

Recent data on housing markets mixed, with new and pending home sales better than forecast but existing home sales disappointing

12:30

USD

Housing Starts MOM% (Apr)

4.7%

-5.8%

12:30

USD

Building Permits (Apr)

730K

764K

12:30

USD

Building Permits MOM% (Apr)

-4.5%

4.5%

13:15

USD

Industrial Production (Apr)

0.6%

0.0%

US manufacturing still generally robust, but regional activity gauges increasingly showing strains

13:15

USD

Manufacturing (SIC) Production (Apr)

--

-0.2%

14:00

USD

Mortgage Delinquencies (1Q)

--

7.6%

14:00

USD

MBA Mortgage Foreclosures (1Q)

--

4.4%

18:00

USD

Minutes of FOMC Meeting

FOMC could emphasize loose policy amid softer data

22:45

NZD

Producer Prices - Inputs (QoQ) (1Q)

0.0%

0.5%

With weak inflation and modest growth, RBNZ rate hike in 2012 appears increasingly unlikely

22:45

NZD

Producer Prices - Outputs (QoQ) (1Q)

0.0%

0.1%

23:50

JPY

Housing Loans YoY (1Q)

--

2.2%

Return to growth expected in 1st quarter, but very soft inflation could lead to further BoJ asset purchases

23:50

JPY

GDP Annualized (1Q P)

3.5%

-0.7%

23:50

JPY

Gross Domestic Product (QoQ) (1Q P)

0.9%

-0.2%

23:50

JPY

Nominal GDP (QoQ) (1Q P)

1.0%

-0.5%

23:50

JPY

GDP Deflator YoY (1Q P)

-1.5%

-1.8%

GMT

Currency

Upcoming Events & Speeches

16:30

USD

Fed’s Bullard Speaks on US Economy in Louisville, Kentucky

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

13.8498

1.8214

8.3420

7.7682

1.2630

Spot

7.1865

5.8390

6.0024

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

1.2886

1.6125

81.13

0.9556

1.0169

1.0070

0.7790

103.73

130.07

Resist. 2

1.2846

1.6090

80.93

0.9526

1.0145

1.0037

0.7764

103.37

129.65

Resist. 1

1.2807

1.6054

80.74

0.9495

1.0120

1.0004

0.7737

103.00

129.24

Spot

1.2729

1.5983

80.35

0.9435

1.0072

0.9937

0.7683

102.28

128.42

Support 1

1.2651

1.5912

79.96

0.9375

1.0024

0.9870

0.7629

101.56

127.60

Support 2

1.2612

1.5876

79.77

0.9344

0.9999

0.9837

0.7602

101.19

127.18

Support 3

1.2572

1.5841

79.57

0.9314

0.9975

0.9804

0.7576

100.83

126.77

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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16 May 2012 03:12 GMT