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Forex: Euro Traders Look to See if ECB Will Break EURUSD, EURJPY

By , Chief Currency Strategist
06 March 2014 04:52 GMT

Talking Points:

  • Dollar In NFPs Pull Unless Risk, Euro Surge Develop
  • Euro Traders Look to See if ECB Will Break EURUSD, EURJPY
  • Yen Crosses Advance a Second Day but at a Slower Clip

Dollar In NFPs Pull Unless Risk, Euro Surge Develop

The Dollar’s trading band is tightening ahead of the ever-ominous NFP employment report due on Friday. Limitedroom for market oscillation along with substantial event risk is the standard recipe for meaningful breakouts. However, we also have to take into account the evolving sensitivities of the greenback and capital markets (risk trends) to the Fed Taper bearings. Has the market acclimated to the steady pace of reduction in QE purchases and no longer considers it a threat to risk appetite (catering to safe haven appeal)? Does the move to curb stimulus expansion give us insight into the timing of the central bank’s eventual return to a rate hike regime (bolstering its yield outlook)? While we can find volatility without resolving these important questions, we can’t have a genuine trend without it.

This past session, we were presented with a suitable dry run. On the data front, the ADP payrolls and ISM service sector survey offered a strong round of data to shape Friday’s BLS (Bureau of Labor Statistics) expectations. Private payrolls grew less than expected with a 139,000 increase that was below the consensus – and the previous month’s reading was downgraded to a 17-month low. Just as concerning, the service sector’s employment component – most US jobs exist in this sector – collapsed. Instead of simply benchmarking the NFP number, we need to assess whether the outcome is likely to be ‘bad’ enough to stay the Fed’s hand on further Tapering. Central banker after central banker has stated bluntly that the stimulus wind down is status quo, and the requirements to turn us off that path are exceptional. That being said, a softening labor figure alongside a negative financial market response can add up to the kind of ‘risk off’ the dollar outperforms in.

Market conditions change, and our strategy should reflect those changes. We have coded the DailyFX-Plus strategies for Breakout, Range and Momentum to adapt to these market shifts.

Euro Traders Look to See if ECB Will Break EURUSD, EURJPY

Monetary policy meetings – especially amongst the major central banks – have lost a significant amount of their market influence over the past few years. That is a natural side effect of fostering a historically low level of interest rates across the board. However, the ECB’s rate decision due today carries with it far more speculative interest than we have seen in most other central banks. Debate over and interest in this particular meeting is the greatest we’ve seen since the lead up to the November meeting which ended in a rate cut. The IMF framed the issues nicely this past session when it issued a warning that the Eurozone is facing risk with inflation in its ‘danger zone’ which in turn could sabotage economic recovery, working off indebtedness and lower unemployment. Their recommendation: both cut the benchmark lending rate and either inject liquidity into the banking system (LTRO) or purchase assets (QE).

The IMF is known for taking the ‘do more’ approach, but there is considerable debate within the market for this event as well. According to Bloomberg, 14 of 54 polled economists believe there will be some sort of rate cut to the benchmark (either to 0.15 or 0.10 percent). That is one option for the central bank – and alone it would likely carry little lasting encouragement for inflation and encouraging loan growth. Another popular option to halt sterilization (draining money) from the ECB’s sovereign bond holdings would similarly fall short of anything but bolstering liquidity alone. A negative deposit rate or LTRO top-off is a more dramatic move with lasting economic and financial implications – and it would certainly present a stronger Euro selloff case. The most bearish outcome for the currency: outright QE. It is also the lowest probability.

Yen Crosses Advance a Third Day but at a Slower Clip

In early morning trade Thursday morning, we find the yen crosses pushing higher. If we close in the green today, it would be the third consecutive daily advance from these crosses following Monday’s market-wide ‘risk off’ slump. Of course, as we close in on significantly levels – just like the S&P 500 at record highs – the conviction and pace of the yen selling (yen cross advance) is cooling. The Nikkei 225 this morning is above 15,000 again which keeps the FX counterparts on a bullish footing. Yet, USDJPY implied volatility is still bouncing at 14 months lows.

British Pound: Watch Gilt Yields, Not BoE Statement

We shouldn’t let our exuberance for the ECB rate decision lead us to entertain hopes for a dramatic pound response to the Bank of England (BoE) policy meeting coming up. The central bank traditionally does not update the market on its bearings when no changes are made – and no change is expected. That said, data is softening for rate forecasts (the BRC inflation figure hit a series low). Watch gilt yields for sterling bearing.

Swiss Franc: SNB Officials Eyeing ECB Decision Anxiously

If the Euro comes under pressure in response to the ECB decision, the EURCHF could suffer another drop towards the SNB’s imposed 1.2000-floor. That is no doubt the concern of the Swiss central bank.We’ve seen the pair drop to 1.2100 for the first time in over a year already this week on European-Ukrainian troubles. The ECB can add another element. But how bold would traders be? Breaking the SNB is improbable.

Canadian Dollar Facing Breakout Risk in Second of Three-Day Data Run

This past session, the Bank of Canada maintained its benchmark interest rate and its neutral forecast while projecting inflation to hold below 2 percent with 2015 GDP around 2.5 percent. This was as ‘in-line’ as the event could have been. Now for the second day of a three-day stretch. A manufacturing survey and building permits figure are due this session. Friday, we have the Canadian jobs figures for February.

Emerging Markets Volatility Collapses – The Most Troubling Outcome

Most emerging market currencies – and particularly those that have maintained the highest correlation to ‘risk trends’ – were gaining against the safe haven dollar this past session. The MSCI Emerging Market ETF meanwhile was little changed and the sector’s volatility index neared a six month low. Rather than reassure, this should concern. Issues in the Ukraine are not settled and risk catalysts lie ahead. This is unnatural quiet.

Gold Correlation to USD an Anchor but ECB May Weigh In

With the global political and economic fears tied into the Ukraine standoff easing, gold’s finicky safe haven status is fading. That said, the metal still managed a modest gain Wednesday to keep the 2014, gradual bull trend in place. The next move from this commodity will likely be news dependent. A big stimulus upgrade from the Euro could charge its anti-fiat appeal. Otherwise, we wait for Friday’s USDollar reaction to NFPs.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Trade Balance (Australian dollar) (JAN)

100M

468M

Following better than expected GDP data, a positive print here could do well for quick bout of Aussi strength.

0:30

AUD

Retail Sales s.a. (MoM) (JAN)

0.4%

0.5%

11:00

EUR

German Factory Orders s.a. (MoM) (JAN)

1.0%

-0.5%

The YoY figure is back at 2011 levels, but far short of 2010 highs in the 20-30 percent region.

11:00

EUR

German Factory Orders n.s.a. (YoY) (JAN)

7.5%

6.0%

12:00

GBP

Bank of England Interest Rate Decision

0.50%

0.50%

The Bank of England has not released a policy statement in sometime, but the rate decision has usually prompted a quick GBP/USD spike as of late.

12:00

GBP

Bank of England Asset Purchase Target

375B

375B

12:45

EUR

European Central Bank Interest Rate Decision

0.25%

0.25%

Although no rate cut is expected, we cannot rule out non-standard measures in light of ECB rhetoric. Be mindful of Draghi’s presser at 13:30GMT.

12:45

EUR

European Central Bank Deposit Facility Rate

0.00%

0.00%

12:45

EUR

European Central Bank Marginal Lending Facility

0.75%

0.75%

13:30

CAD

Building Permits (MoM) (JAN)

1.7%

-4.1%

Vancouver Home prices last month were up 40% YoY!

13:30

USD

BLS Releases Revisions to Productivity and Cost

Aside from EUR/USD, we may see further consolidation of USD crosses ahead of Friday’s NFP report.

13:30

USD

Non-Farm Productivity (4Q F)

2.6%

3.2%

13:30

USD

Unit Labor Costs (4Q F)

-1.0%

-1.6%

13:30

USD

Initial Jobless Claims (MAR 1)

337K

348K

13:30

USD

Continuing Claims (FEB 21)

2964K

15:00

CAD

Ivey Purchasing Managers Index s.a. (FEB)

53.1

56.8

Forecast calls for a sharp decline in index, but series is innately volatile

15:00

USD

Factory Orders (JAN)

-0.5%

-1.5%

December was the worst reading since summer.

17:00

USD

Household Change in Net Worth (4Q)

$1922B

A recent slowing in home price growth may have been supplemented by portfolio gains with record high stocks

22:30

AUD

AiG Performance of Construction Index (FEB)

48.2

After a massive run since April, the figure has fallen consistently since November.

23:00

NZD

QV House Prices (YoY) (FEB)

9.6%

These are the highest levels since early 2008.

GMT

Currency

Upcoming Events & Speeches

0:00

USD

Fed's Richard Fisher Speaks on U.S. Economy

1:30

USD

Fed's John Williams Speaks on U.S. Economy

13:30

EUR

ECB President Mario Draghi Delivers Policy Statement

13:30

USD

Fed's William Dudley Speaks on U.S. Economy

18:00

USD

Fed's Charles Plosser Speaks on Monetary Policy

22:30

AUD

RBA Governor Glenn Stevens Speaks on Australian Economy

23:00

USD

Fed's Dennis Lockhart Speaks on U.S. Economy

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 18:00 GMT

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

14.0200

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.2810

2.2066

10.7710

7.7608

1.2707

Spot

6.4490

5.4333

6.0130

Support 1

13.0000

2.1000

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3834

1.6783

103.08

0.8947

1.1164

0.9038

0.8466

141.76

1360.21

Res 2

1.3810

1.6754

102.84

0.8929

1.1144

0.9016

0.8446

141.39

1354.35

Res 1

1.3785

1.6726

102.61

0.8910

1.1124

0.8994

0.8425

141.02

1348.49

Spot

1.3735

1.6669

102.13

0.8873

1.1085

0.8950

0.8383

140.28

1336.77

Supp 1

1.3685

1.6612

101.65

0.8836

1.1046

0.8906

0.8341

139.54

1325.05

Supp 2

1.3660

1.6584

101.42

0.8817

1.1026

0.8884

0.8320

139.17

1319.19

Supp 3

1.3636

1.6555

101.18

0.8799

1.1006

0.8862

0.8300

138.80

1313.33

v

--- Written by: John Kicklighter, Chief 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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06 March 2014 04:52 GMT