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Euro More Exposed to Inflation Data Than Many Expect

By Research, Research Team
10 April 2014 03:56 GMT

Talking Points:

  • Dollar: FOMC Minutes Supply Bears with More Fuel
  • Euro More Exposed to Inflation Data Than Many Expect
  • British Pound Hits 4 Year Highs, Further Move Not BoE Dependent

Dollar: FOMC Minutes Supply Bears with More Fuel

Though it didn’t suffer the same bearish intensity endured Tuesday, the dollar nevertheless extended it tumble through this past session. The Dow Jones FXCM Dollar Index (ticker = USDollar) is now down four consecutive days and 1.4 percent. Amongst the majors, we see the uniform weakness versus fellow liquidity leaders (euro), equal standing safe havens (yen) and high-yield counterparts (Australian dollar). This slump suggests an innate struggle which directs us back to the retreat in rate expectations. Further feeding the drop in dollar and Treasury yields the FOMC minutes noted some concern that markets may assume a more hawkish Fed that what is intended. Hardly a revelation unless bears were looking for a reason to reinforce their view. Unless the Taper is halted, though, this slide has limited room to run.

See what I expect from the US dollar and its major pairs in today's Strategy Video.

Euro More Exposed to Inflation Data Than Many Expect

It is easy to evaluate the Euro on the performance of the EURUSD alone. Up three straight trading days and once again above 1.3850, this pair looks like it is backed by the motivation to make a second attempt on 1.4000. Realizing such a bullish target, however, requires far more robust participation from the euro. Much of the benchmark currency pair’s performance is the responsibility of the dollar and its unique weakness. For pairs like EURGBP, EURAUD or even EURCHF; we see little of that same conviction. The steady – albeit moderate – stream of capital flowing backing into the Eurozone for reserves diversification and speculative appetite for periphery yield wouldn’t be a strong enough motivator to offset a convincing bearing development. Ahead, we have a very serious test of conviction in the Eurozone. Economic surveys for Bloomberg, jobs figures (for Greece) and inflation data for the ‘periphery’ will tell us whether the weakest link in the chain necessitates stimulus.

British Pound Hits 4 Year Highs, Further Move Not BoE Dependent

GBPUSD closed at 1.6793 Wednesday – the highest level in over four years. This would be an impressive reading if it were a true reflection on the sterling itself. While the currency rose versus the dollar and yen – two general underperformers on the day – its balance was one of modest weakness. Between a 0.1 and 0.2 percent slip for the rest of the majors shows the pound was struggling for its own momentum. And, it will likely struggle again this session. Ahead, we have the Bank of England (BoE) rate decision. While central bank policy updates are usually favored trader fare, little – if anything – is expected from this group as they remain mum when they don’t change policy tack.

Yen Crosses Rebound as Risk Bounce Quiets BoJ’s Cap on QE

Realization that the Bank of Japan (BoJ) is not going to readily upgrade its stimulus effort without very provocation is setting in. Yet, when it comes to deciding whether the yen crosses will be left to drift or topple to close the value gap to fall more closely in line with yields, this is not a high-pressure driver. To reverse an 18-month bull trend and send USDJPY below 101 or EURJPY below 140, a more motivated spark is needed to push unwinding of this low-yielding carry build up. The most effective driver in this scenario would be a universal risk aversion move. With the Nikkei 225 holding 14,250 and S&P 500 jumping from 1,840, there is limited momentum to this call.

Australian Dollar Rally Extended by Upgraded Jobs, Inflation Data

Inflation and economic trends are still well off the pace necessary to elicit appraisals of robust growth and imminent rate hike potential in Australia, but the improvement is still meaningful for a currency attempting to return to carry form. This morning, two pieces of data were released: the Consumer Inflation Expectation survey for April and March unemployment figures. A rise in perceived price pressures to a 2.4 percent clip puts the measure back within the central bank’s target zone and further distances us to further cuts. Meanwhile, an unexpected drop in the unemployment rate to 5.8 percent may be skewed by a drop in the participation rate, a drop in full-time jobs and the fact that jobless rate is coming off a decade high; but yields are still up through it. The 2-year Aussie bond yield jumped to 2.85 percent.

China Yuan Slips Versus Dollar, Trade Data Improves

While China would raise the reference rate for the yuan exchange this morning to 6.1510, the currency’s performance is still remarkable. Despite the universal slip from the greenback this past session, the off-shore Renmimbi rate (USDCNH) would still advance. From January’s record low level, this exchange rate is still up 3 percent – substantial for a managed rate that has been touted as a one-way carry for many international investors. For data, the government reported its March trade figures this morning. The $7.71 billion surplus was better than the $1.80 billion positive read expected. Yet, the comparison to the second largest deficit on record (-$22.99 billion) reported in the previous reading is somewhat skewed due to the seasonal factor. Nevertheless, the unexpected drop in exports (6.6 percent) from a year ago is still a concern. Yet, hopes for stimulus likely still reside with financial issues (like defaults and liquidity crunches) than economic concerns.

Emerging Markets Have Risen for 13 Out of the Past 15 Trading Days

Emerging market currencies and capital market benchmarks are pushing higher. The MSCI Emerging Market ETF has tipped yet another five-month high and is now green on 13 of its past 15 trading days (three weeks). This has encompassed a 10.7 percent rally within that time frame. Meanwhile, the same segment’s sovereign bond index (from Bloomberg) has pushed a 10-month high of its own, while credit default swaps are back at lows for the year (271.6 bps). In tallying the FX performance, the larger EM currencies posted the best performance. The Korean Won is up 1.6 percent through this morning after the central bank held its benchmark rate, the South African Rand rose 0.8 percent and the Brazilian Real rose 0.8 percent versus the dollar.

Gold Advance Slows as Dollar Tumble Eases

Spot gold managed to squeak out a second consecutive gain Tuesday – the first back-to-back advance for the metal in four weeks – but confidence was visibly lacking. Where the physical and SPDR Gold Trust ETF rose 0.2 percent through the session, the active futures contract actually slipped 0.2 percent through the day. Furthermore, the gain measured versus the dollar evaporates when we measure the day’s performance in other currencies. For fundamental drive, general risk trends were aiming modestly higher and inflation expectations were relatively untouched for the day. The best source of drive would come from the dollar’s weakness – which matches momentum well.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

-:-

CNY

Aggregate Financing (Yuan) (MAR)

1907.0B

938.7B

Any deviation from surveys here could prompt AUD volatility ahead of the employment print.

-:-

CNY

New Yuan Loans (MAR)

1000.0B

644.5B

2:00

CNY

China Trade Balance

$1.80B

-$22.99B

Expected return to surplus after second largest deficit on record

1:00

AUD

Consumer Inflation Expectation (APR)

2.1%

After last month’s print that beat estimates by over 3x, this figure is crucial as the AUD/USD pair touches multi-month highs. Any disappointment here could give USD bulls the fundamental catalyst needed to sell Aussie.

1:30

AUD

Employment Change (MAR)

2.5K

47.3K

1:30

AUD

Unemployment Rate (MAR)

6.1%

6.0%

1:30

AUD

Full Time Employment Change (MAR)

80.5K

6:30

EUR

Eurozone Economic Survey - Bloomberg (APR)

Core Eurozone growth forecast expected to remain steady, but weakness can lead the ECB to finally act on other issues like deflation.

6:35

EUR

Germany Economic Survey - Bloomberg (APR)

6:45

EUR

France Economic Survey - Bloomberg (APR)

6:45

EUR

Italy Economic Survey - Bloomberg (APR)

6:45

EUR

French Consumer Price Index (MoM) (MAR)

0.6%

0.6%

Read more about what April inflation figures in the EU mean for the Euro.

6:45

EUR

French Consumer Price Index (YoY) (MAR)

0.7%

0.9%

6:50

EUR

Spain Economic Survey - Bloomberg (APR)

Periphery Eurozone is the greatest risk to a passive central bank and a stable economic backdrop. Growth expectations can shape investor flows and inflation measures can leverage the need for the ECB to head off further deflation risks

6:50

EUR

Greece Economic Survey - Bloomberg (APR)

7:00

EUR

Cyprus Economic Survey - Bloomberg (APR)

9:00

EUR

Greece Unemployment Rate (JAN)

9:00

EUR

Greece CPI (MAR)

10:00

EUR

Portugal CPI (MAR)

10:00

EUR

Ireland CPI (MAR)

11:00

GBP

Bank of England Interest Rate Decision

0.50%

0.50%

We may see greater follow through here as the meeting does not proceed the ECB.

11:00

GBP

Bank of England Asset Purchase Target

375B

375B

12:30

CAD

New Housing Price Index (YoY) (FEB)

1.5%

CAD has been eating stops for those who have positioned themselves for a 2014 breakout in USDCAD. Data has been strong, but a resumption of weakness could prove difficult for the Loonie.

12:30

CAD

New Housing Price Index (MoM) (FEB)

0.3%

12:30

USD

Initial Jobless Claims (APR 5)

320K

326K

The 13-week (1Q) average for initial claims has leveled out since September

12:30

USD

Continuing Claims (MAR 29)

2835K

2836K

12:45

USD

US Economic Survey – Bloomberg (APR)

A steady outcome can reset the recent dovish drive for the dollar recently

18:00

USD

Monthly Budget Statement (MAR)

-$36.0B

-$106.5B

The previous month’s deficit presented the smallest February shortfall since 2008

22:45

NZD

Food Prices (MoM) (MAR)

-1.0%

A decline here in food price inflation could put pressure on Kiwi strength.

23:50

JPY

Domestic Corp Goods Price Index (MoM) (MAR)

0.1%

-0.2%

YoY estimates have been upped by a tenth of a percent over the last week.

23:50

JPY

Domestic Corp Goods Price Index (YoY) (MAR)

1.8%

1.8%

GMT

Currency

Upcoming Events & Speeches

1:30

JPY

BoJ's Miyao Speaks on Japanese Economy

8:00

EUR

European Central Bank Monthly Report

13:00

EUR

ECB's Peter Praet Speaks on Euro Economy

15:30

EUR

ECB's Constancio, Fed's Evans Speak on Global Economy

18:00

EUR

ECB's Vitor Constancio Speaks on Euro Economy

23:50

JPY

Bank of Japan Meeting Minutes

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.9820

2.1043

10.3894

7.7538

1.2471

Spot

6.4846

5.3902

5.9372

Support 1

12.9650

2.0700

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

1.3937

1.6902

102.67

0.8855

1.0957

0.9495

0.8800

142.35

1335.98

Res 2

1.3916

1.6878

102.46

0.8839

1.0939

0.9476

0.8781

142.03

1330.88

Res 1

1.3894

1.6853

102.26

0.8824

1.0921

0.9456

0.8761

141.71

1325.77

Spot

1.3851

1.6804

101.84

0.8793

1.0886

0.9417

0.8723

141.06

1315.56

Supp 1

1.3808

1.6755

101.42

0.8762

1.0851

0.9378

0.8685

140.41

1305.35

Supp 2

1.3786

1.6730

101.22

0.8747

1.0833

0.9358

0.8665

140.09

1300.24

Supp 3

1.3765

1.6706

101.01

0.8731

1.0815

0.9339

0.8646

139.77

1295.14

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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The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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10 April 2014 03:56 GMT