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Forex: Euro Traders Ready for ECB Decision, EUR/USD Range at Risk

By , Chief Currency Strategist
10 January 2013 03:18 GMT

  • Dollar Suffers as Quiet Markets Bolster Carry Appetites
  • Euro Traders Ready for ECB Decision, EUR/USD Range at Risk
  • Japanese Yen Gives Back Bulk of the Gains from its Biggest Rally in Months
  • Australian Dollar Firms as Low Volatility, Chinese Trade Data Pumps Return
  • British Pound: Will the Bank of England Provide Volatility?
  • New Zealand Dollar Advances Across the Board, Trade Data Ignored
  • Gold Looks for Action on European, Japan, US Stimulus ‘Threats’

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Dollar Suffers as Quiet Markets Bolster Carry Appetites

The Dow Jones FXCM Dollar Index (ticker = USDollar) advanced for the first time in three days, but the absence of a supporting fundamental drive meant its performance was lacking for strength. The economic docket was barren for the day; and the top, direct headline was that Moody’s said it expected further positive US credit events over the coming months as the fiscal crisis was worked on (and the dollar’s relief rally in the US avoiding a downgrade after the Fiscal Cliff has been spent). To see the greenback once again climb with zeal, a market-wide wave of risk aversion is necessary to activate the currency’s safe haven status – though we are starting to slowly see US yields overtake global counterparts, it doesn’t present the same level of advantage as its reserve appeal. That being said, the VIX Volatility Index tagged a fresh five-and-a-half year low Wednesday and the S&P 500 seems anchored just off multi-year highs. We should watch for the influence of the upcoming ECB rate decision and Friday’s Wells Fargo earnings report on the dollar, but a serious trend needs definitive ‘fear’.

Euro Traders Ready for ECB Decision, EUR/USD Range at Risk

The euro was a mixed bag Wednesday, caught up in the meandering pace of general risk trends. This same lack of volatility has helped EURUSD in particular maintain an otherwise risky 135-point range above the closely watched 1.3000 figure. Given the pair’s lack of breathing room, a necessary breakout is a high probability. All that is needed is a little encouragement from a significant fundamental development. Of course, the most influential catalyst to start this benchmark pair moving - and keep it running in a meaningful trend - would be a serious shift in market-wide, investor sentiment. While that high threshold is unlikely to be met in the immediate future, top event risk in the ECB rate decision scheduled for the upcoming session may prove influential enough to force a breakout on the Euro’s reaction.

The danger in the forthcoming European Central Bank policy decision is market complacency. Though well founded, both the market and economists are heavily pricing in no change to the benchmark rate. In fact, according to the Bloomberg consensus, 50 of the 55 polled economists expect no change and overnight swaps show no probability of a rate cut. Therein lies the potential for market volatility. Looking back to the December monetary policy meeting, there was mild speculation circulating that the central bank would hint at intentions to cut moving forward. President Draghi repeated that rates were ‘accommodative’ (suggesting no change in mood), but there was also a hint that at least some members voted for a cut. The central banker also said that there was a ‘brief’ conversation of the consequences of a negative deposit rate – this rate is already at zero. Where the most carry over risk comes in from the last meeting though was the ECB’s downgraded view for 2013 GDP (from a 0.5 percent growth to a 0.3 percent contraction) and inflation (below target at 1.75 percent).

With a view of further recession in the Eurozone, inflation below objective and the risk of a renewed financial crisis; there is plenty of support should policy officials decide to cut rates further. For the euro, though its benchmark rate is low, cutting the yield even further would significantly undermine its appeal especially against a currency like the dollar whose benchmark is already at absolute lows. Then again, the alternative would be no change with no change to the gloomy forecast (it wouldn’t change this quickly) which would leave the euro unfazed as that is already priced in. That is a good fundamental risk-reward as we keep a close eye on the 1.3000 level for EURUSD.

Japanese Yen Gives Back Bulk of the Gains from its Biggest Rally in Months

Following its strongest advance in over four months, the yen proceeded to give back all of its gains Wednesday. The yen crosses are certainly exposed to a correction whether instigated by natural profit taking, risk aversion or a combination of the two; but in extremely quiet market conditions like those we are currently experiencing, the status quo means more carry. The fundamental conversation outside of risk trends for the yen continues to focus on the possibilities of the BoJ adding stimulus and raising the inflation target. Yet that is still two weeks away.

Australian Dollar Firms as Low Volatility, Chinese Trade Data Pumps Return

We can tell what fundamentals truly matter for an economy when we see how the currency reacts as the news crosses the wires. Over the past few days, the biggest trade deficit in years and a jump in home sales barely nudged the Aussie dollar. However, this morning, a significantly stronger-than-expected Chinese trade figure for December leveraged a 55-pip AUDUSD rally. Strong trade for Australia’s largest trade partner translates into Growth for China and demand for raw materials from Australia. Don’t expect this data to sustain a rally without risk though.

British Pound: Will the Bank of England Provide Volatility?

Though most eyes will be on the ECB rate decision in the upcoming session, the Bank of England (BoE) will also be on tap for its policy gathering. The difference between the two, however, is that the latter is mum when it holds policy unchanged; and even if it did move, a shift in asset purchases would likely result in the same lack of surprise from the pound. Expect more from a secondary wave from the ECB outcome.

New Zealand Dollar Advances Across the Board, Trade Data Ignored

Despite being an indirect fundamental driver, the Chinese trade report had more influence over the Australian dollar than the New Zealand’s own account had over the kiwi. It certainly didn’t help those looking for volatility that the November trade report printed almost exactly in line with a NZ$700 million deficit. The QV House Prices report for December was similarly disarming with a 5.7 percent match to the previous month.

Gold Looks for Action on European, Japan, US Stimulus ‘Threats’

For the academically-inclined, it would seem that gold should be experiencing more volatility – and perhaps more of a bid. The Japanese government and central bank are maintaining vows to drive stimulus in the world’s third largest economy and we are coming up on the ECB rate decision. Nevertheless, gold is still holding below 1,665 and show little intention of changing its slow but consistent three-month bear trend.

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

0:00

NZD

ANZ Commodity Price (DEC)

-

1.0%

Commodity inflation has rebounded from -4.5% in 4/2012.

0:30

AUD

Building Approvals (MoM) (NOV)

3.0%

-7.6%

Yearly figure has improved since -21% decline on 4/2012.

0:30

AUD

Building Approvals (YoY) (NOV)

11.6%

14.5%

0:32

CNY

Foreign Exchange Reserves (DEC)

$3317.0B

$3280.1B

Increased from $1T to over $3.2T since 2006.

0:32

CNY

New Yuan Loans (DEC)(DEC)

550.0B

522.9B

Demand for loans appeared to be in a downtrend during 2012.

2:00

CNY

Trade Balance (DEC)

$20.00B

$19.63B

On pace to post a surplus, but current trend concerning.

2:00

CNY

Imports (YoY) (DEC)

3.5%

0.0%

In a downtrend since 1/2010 high at 85.5%.

2:00

CNY

Exports (YoY) (DEC)

5.0%

2.9%

In down trend since 5/2010 high of 48.5%.

5:00

JPY

Leading Index CI (NOV P)

-

92.8

12 month average at 94.4.

5:00

JPY

Coincident Index CI (NOV P)

-

90.7

Trending down, 12 month average at 94.5.

EUR

Greece Unemployment Rate (OCT)

-

26.0%

12:00

GBP

Bank of England Rate Decision

0.50%

0.50%

8% probability of 25bp rate cut.

12:00

GBP

BOE Asset Purchase Target

375B

375B

12:45

EUR

European Central Bank Rate Decision

0.75%

0.75%

1.6% probability of 25bp rate hike.

12:45

EUR

ECB Deposit Facility Rate

0.00%

0.00%

13:30

USD

Initial Jobless Claims (JAN 5)

365K

372K

12 month average at 374.5K.

13:30

USD

Continuing Claims (DEC 5)

3228K

3245K

12 month average at 3,318.8K.

13:30

CAD

New Housing Price Index (MoM) (NOV)

0.2%

0.2%

House prices have flattened out. 12 Month average at 0.2%.

13:30

CAD

New Housing Price Index (YoY)(NOV)

2.4%

2.4%

13:30

CAD

Building Permits (MoM) (NOV)

-5.0%

15.0%

Improved sharply last month, but has tendency to waver around the Zero mark.

23:50

JPY

Current Account Total (Yen) (NOV)

-¥17.1B

¥376.9B

In clear down trend since 2007.

23:50

JPY

Adjusted Current Account Total (Yen)(NOV)

¥277.4B

¥414.1B

23:50

JPY

Bank Lending Banks ex-Trust (DEC)

1.1%

1.3%

Bank lending began growing in 11/2011. Continues to strengthen.

23:50

JPY

Bank Lending incl Trusts (YoY) (DEC)

-

1.0%

Increased from $1T to over $3.2T since 2006.

GMT

Currency

Upcoming Events & Speeches

9:30

EUR

Spain to Sell 2, 5 and 13-Year Bonds

10:00

EUR

Luxembourg's Juncker Speaks to EU Parliament Panel

13:30

EUR

ECB'S Draghi Holds Press Conference After Rate Decision

17:00

EUR

ECB's Asmussen Speaks on Panel in Berlin

18:00

USD

US to Sell 30-Year Treasuries

18:10

USD

Fed's George Speaks on Economic Outlook in Kansas City

19:00

USD

Fed's Bullard Speaks on Economy in Wisconsin

21:00

CAD

Bank of Canada Senior Deputy Governor Macklem Speaks

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

12.8016

1.7795

8.5865

7.7514

1.2281

Spot

6.5609

5.7054

5.6013

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

1.3175

1.6148

88.36

0.9313

0.9927

1.0576

0.8463

115.78

141.97

Resist. 2

1.3150

1.6123

88.14

0.9296

0.9913

1.0557

0.8444

115.44

141.58

Resist. 1

1.3125

1.6098

87.93

0.9279

0.9899

1.0537

0.8425

115.10

141.19

Spot

1.3076

1.6049

87.50

0.9245

0.9871

1.0498

0.8386

114.41

140.42

Support 1

1.3027

1.6000

87.07

0.9211

0.9843

1.0459

0.8347

113.72

139.65

Support 2

1.3002

1.5975

86.86

0.9194

0.9829

1.0439

0.8328

113.38

139.26

Support 3

1.2977

1.5950

86.64

0.9177

0.9815

1.0420

0.8309

113.04

138.87

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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10 January 2013 03:18 GMT