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Forex: Dollar Suffers Biggest Hit in 12 Weeks, EUR/USD Clears 1.3050

By , Chief Currency Strategist
05 December 2012 06:16 GMT

  • Forex: Dollar Suffers Biggest Hit in 12 Weeks, EUR/USD Clears 1.3050
  • Euro Climb Against Dollar, Swiss Franc Speaks to Serious Strength
  • Australian Dollar: Is an RBA Rate Cut Reason for AUD/USD to Overtake 1.05?
  • British Pound Buoyant Ahead of Osborne’s Autumn Statement
  • Canadian Dollar Unmoved by Bank of Canada’s Persistent Hawkishness
  • New Zealand Dollar: Will the RBNZ Rate Reaction be As Complicated as the RBA?
  • Gold: If the Dollar is Dropping, What Does that Say About Gold’s Tumble?

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Forex: Dollar Suffers Biggest Hit in 12 Weeks, EUR/USD Clears 1.3050

Though general market conditions are not conducive to maintaining trends and US equities – as a benchmark for risk appetite – have floundered, the safe haven dollar has nevertheless suffered. Through Tuesday’s close, the greenback took another impressive tumble and subsequently shifted momentum. From the equally-weighted Dow Jones FXCM Dollar Index (ticker = USDollar), technical traders would notice that the benchmark broke the floor of its rising trend channel from mid-September at the start of the week and has continued with its biggest back-to-back decline since the previous bear cycle ended. From its pairings, we can see the dollar’s struggle play out especially in its most liquid counterpart. EURUSD has advanced for five consecutive days and is up 13 out of the past 16 trading sessions. That is a strong sign for dollar weakness from the FX market’s most liquid pair.

Though, with a seven-month high within view for the EURUSD (at 1.3150), it is important to recall the market conditions that we are currently saddled with. First and foremost, conviction (the fundamental term for trend) is particularly difficult to develop and sustain. On the one hand, we have the natural seasonality effect we usually find through year end. On the other, we have the unnatural lack of participation (volume and open interest) that comes as a result of questionable growth, yield and financial stability forecasts. Add to that the big-ticket and ill-defined event risk (Fiscal Cliff, Euro Crisis, Fed decision) ahead; and there is considerable resistance to developing a cross-market trend based on one of the primary market themes – most notably risk appetite trends. Tempered trading conditions have curbed the dollar, but they may also spare it.

Euro Climb Against Dollar, Swiss Franc Speaks to Serious Strength

The euro is doing exceptionally well so far this week. Since trading started back up with the return of liquidity, the currency has shown consistent gains across the board. Most impressive is its performance against the dollar (up 1.0 percent since Friday’s close), but it is the climb against the Swiss franc and British pound that truly speak to its performance. The sterling is one step away from the epicenter of Euro-borne financial illness, so EURGBP strength is encouraging. Yet, considering capital outflow from the region attempting to avoid economic troubles, credit crunches and tax changes is the primary source of EURCHF weight; its recovery stands out above all else. In this pair’s impressive 100-pip run, we see a reduction in ‘tail risk’ for the Eurozone (the probability of another crisis level development). That said, the euro’s climb has come quickly and breaks from underlying market conditions. With the ECB on Thursday (unlikely to change its stance) and the Greek aid payout decision not until next Thursday; this relief rally for the euro will likely soon sputter without an active driver to keep it going.

Australian Dollar: Is an RBA Rate Cut Reason for AUD/USD to Overtake 1.05?

Though a rate cut from the RBA yesterday didn’t carry the potential for a heavy selling wave against the Aussie currency – swaps and economist forecasts already showed heavy expectations for just such a move – meeting forecasts also shouldn’t be a source of strength. The FX market’s most prominent investment currency gained ground against safe benchmark safe havens like the US dollar and Japanese yen, which could have been more a factor of underlying sentiment drive than actual Aussie dollar strength. However, when we look at the AUDCAD’s reaction to the news, we can see how the news was interpreted. What was bullish about the event? The benchmark rate was lowered to 3.00 percent and the statement that accompanied the decision was hardly more ‘hawkish’. Some have given credence to very modest changes to the remarks, but they won’t like pull the central bank off course (swaps show a 56 percent chance of another cut in February). Without risk, this run is in danger.

British Pound Buoyant Ahead of Osborne’s Autumn Statement

The sterling has been happy to follow in the wake of the euro – a reduced risk of regional crisis certainly carries benefit for the British currency. However, the market’s ability to ignore UK fundamentals will be put to a serious test in the upcoming session. Chancellor of the Exchequer George Osborne is scheduled to deliver his Autumn Statement, and conditions have certainly changed. The weaker than expected economic activity and lower tax revenues put the policymaker in an uncomfortable position where he will need to prevent a deeper economic contraction while also preserving the country’s top AAA credit rating. Also worth watching is the service sector PMI for a GDP proxy.

Canadian Dollar Unmoved by Bank of Canada’s Persistent Hawkishness

We would expect a little more volatility out of the RBA decision considering they moved rates (though the market reacted the opposite of fundamental expectations). But it is still remarkable that the Bank of Canada’s persistent hawkish lean does not draw more of a contrast to its global counterparts. The central bank announced once again that slack would eventually be worked off and Canada’s would have to remove accommodation. Yet, perhaps the market sees Governor Carney’s mid-year exit and transition a stay of execution for over 8 months.

New Zealand Dollar: Will the RBNZ Rate Reaction be as Complicated as the RBA?

Keeping the monetary policy theme of this week going, the Reserve Bank of New Zealand will look to gap yesterday RBA and BoC decision and Thursday’s ECB and BoE meets. The market is reflection little speculation of a change in policy at this particular meet and the medium-term outlook is still showing limited support for a dovish shift. That said, a lack of concern is generally the genesis for considerable market volatility. Would Governor Wheeler change his bearing with the round of bad data? It is unlikely, but if he does, the kiwi will react badly.

Gold: If the Dollar is Dropping, What Does that Say About Gold’s Tumble?

We know one of gold’s dominant fundamental roles in the global financial markets has recently been as a primary alternative store of wealth to traditional currencies (and government debt). That is where the strong negative correlation between the dollar and gold has developed. And yet, despite the greenback’s slide this past session, gold had also marked an impressive break lower of its own below 1705. This speaks to extended weakness from the metal, but perhaps also a correlation breakdown. In all the attempts this year to curb it, all have snapped back violently.

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:01

GBP

BRC Shop Price Index (YoY) (NOV)

1.5%

May improve as UK economy grows on own domestic power

0:30

AUD

GDP (YoY) (3Q)

3.1%

3.7%

Australian output expected to grow slower than previous in quarterly report; RBA had data in rate decision

0:30

AUD

GDP (QoQ) (3Q)

0.6%

0.6%

1:45

CNY

HSBC Services PMI (NOV)

53.5

Expected to follow manufacturing data higher

8:45

EUR

Italian PMI Services (NOV)

46

46

Eurozone PMIs show stable rate of decline; could be eventual pivot

8:50

EUR

French PMI Services (NOV F)

46.1

46.1

8:55

EUR

German PMI Services (NOV F)

48

48

9:00

EUR

Euro-Zone PMI Composite (NOV F)

45.8

45.8

9:00

EUR

Euro-Zone PMI Services (NOV F)

51

50.6

9:30

GBP

Official Reserves (Changes) (NOV)

-$512M

May continue decrease as Eurozone improvements continue

9:30

GBP

PMI Services (NOV)

51

50.6

Services sector growing

10:00

EUR

Euro-Zone Retail Sales (YoY) (OCT)

-0.8%

-0.8%

Consumer spending expected to continue weakness as debt problems drag on

10:00

EUR

Euro-Zone Retail Sales (MoM) (OCT)

-0.2%

-0.2%

12:00

USD

MBA Mortgage Applications (NOV 30)

-0.9%

Declining weekly data could indicate further Fed purchases targeting housing market

13:15

USD

ADP Employment Change (NOV)

125K

158K

Expected data more than 90k expected for official NFPs

13:30

USD

Non-Farm Productivity (3Q F)

2.7%

1.9%

Final revisions confirms pickup in labor during third quarter

13:30

USD

Unit Labor Costs (3Q F)

-0.9%

-0.1%

15:00

USD

Factory Orders (OCT)

0.0%

4.8%

Hurricane Sandy may be blamed

15:00

USD

ISM Non-Manufacturing Composite (NOV)

53.5

54.2

Services could slower slightly

15:30

USD

DOE U.S. Crude Oil Inventories (NOV 30)

-347K

Continued decline in crude inventories may push WTI crude prices back above $90

15:30

USD

DOE Cushing OK Crude Inventory (NOV 30)

707K

15:30

USD

DOE U.S. Gasoline Inventories (NOV 30)

3865K

15:30

USD

DOE U.S. Distillate Inventory (NOV 30)

-800K

20:00

NZD

RBNZ Rate Decision

2.50%

2.50%

RBNZ expected to hold, caught between the effects of a slowing China but improving housing market

GMT

Currency

Upcoming Events & Speeches

1:30

JPY

BoJ Deputy Governor Nishimura Speaks to Business Leaders

9:30

EUR

Spain to Sell 3, 6 and 10-Year Bonds

12:30

GBP

UK Chancellor Osborne Makes Autumn Statement in Commons

23:50

JPY

Weekly Foreign Investment Capital Flows

SUPPORT AND RESISTANCE LEVELS

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

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

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USDMXN

USDTRY

USDZAR

USDHKD

USDSGD

Currency

USDSEK

USDDKK

USDNOK

Resist 2

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

6.1875

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.9190

5.8200

Spot

12.9518

1.7845

8.7955

7.7501

1.2177

Spot

6.5962

5.6982

5.6220

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.5840

5.6000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

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

1.3197

1.6189

82.67

0.9340

0.9990

1.0547

0.8307

108.44

133.19

Resist. 2

1.3171

1.6166

82.49

0.9322

0.9976

1.0527

0.8290

108.15

132.87

Resist. 1

1.3145

1.6143

82.31

0.9304

0.9961

1.0507

0.8273

107.87

132.56

Spot

1.3093

1.6098

81.96

0.9268

0.9932

1.0468

0.8238

107.30

131.93

Support 1

1.3041

1.6053

81.61

0.9232

0.9903

1.0429

0.8203

106.73

131.31

Support 2

1.3015

1.6030

81.43

0.9214

0.9888

1.0409

0.8186

106.45

130.99

Support 3

1.2989

1.6007

81.25

0.9196

0.9874

1.0389

0.8169

106.16

130.68

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

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05 December 2012 06:16 GMT