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Dollar Can’t Gain Traction at Multi-Year Highs, Watch USD/JPY

By , Chief Currency Strategist
25 April 2013 02:53 GMT
  • Dollar Can’t Gain Traction at Multi-Year Highs, Watch USD/JPY
  • British Pound: GBP/USD Breakout Expected on UK GDP
  • Japanese Yen in the Bank of Japan Pull
  • Euro: Building Up Market Speculation Around Rate Expectations
  • Australian Dollar: RBA Announces FX Diversification, Rate Outlook Falling
  • New Zealand Dollar Manages to Hold Gains after RBNZ Hold
  • Gold: Stories of Physical Demand Contrast Sharp Drop in Trading

Range Trade Strategies work best in quiet market conditions - such as the Asia trading session

Dollar Can’t Gain Traction at Multi-Year Highs, Watch USD/JPY

Another day, another two-and-a-half year high from the Dow Jones FXCM Dollar Index (ticker = USDollar). Yet, ‘new high’ gives a false sense of strength to the lackluster greenback. In reality, the benchmark currency has made little effort to capitalize on its move above March’s swing high and in fact has utterly failed to generate meaningful follow through to convince the market that the bulls are in charge. The issue remains the headwinds seen in risk trends. While the safe haven dollar is climbing, so too is the S&P 500 leading global equities to hearty gains. While the two can move in concert to some degree thanks to the competitive monetary policy programs across the world, a genuine trend requires the support of the more elemental themes. The best way for USDollar to overtake 10,600 is for a maket-wide risk aversion. Otherwise, we could arrive at the same outcome – though likely with limited immediate follow through – with a USDJPY break above 100.

British Pound: GBP/USD Breakout Expected on UK GDP

There is a tangible risk of high volatility for the British pound in the upcoming session. And, for the sterling watcher that pairs the fundamentals and potentially-explosive technical patterns hemming the currency in; that represents serious trade potential. For the upcoming session, the docket is dominated by the United Kingdom’s first read of first quarter GDP. The health of a nation’s economy is important to the value of its currency as capital will flood into a region where expansion promises asset appreciate or yield and flee a hobbled region. The situation, however, is even more complicated for the UK. If there is a negative quarterly print for the period (the consensus is for 0.1 percent growth), it would confirm a technical recession – which is back-to-back negative quarters of GDP.

A negative print for this country specifically would earn the UK the very unflattering label of a ‘triple dip recession’. Not only would investment appeal be crimped from such an assessment, but it would reflect harshly on the government’s persistent drive towards austerity as well as the Bank of England’s (BoE) refusal to follow the Fed and BoJ into larger stimulus programs. It isn’t difficult to imagine speculation of competitive stimulus from the MPC from a poor showing. Regardless, given the tight congestion on pairs like GBPUSD, a breakout is on the agenda.

Japanese Yen in the Bank of Japan Pull

The average daily range from USDJPY over the past three trading days is a meager 84 pips. We haven’t seen a level of inactivity like this since the pair reversed two weeks ago after failing below 100. Before for that, we have only seen activity levels of this scale when the market was chopping higher on pure faith that a massive stimulus program would be introduced by the Bank of Japan (BoJ). The fundamental backdrop is very different today. We have the plan laid out before us. Yet, is it enough? Has the rapid depreciation of the yen to this point represented the speculative build up in the first half of the ‘Buy the Rumor, Sell the News’ adage? Profit taking and risk aversion are tangible themes for traders to watch for; but consistent risk trends, a new stimulus program and presence of entry orders above 100 beckons.

Euro: Building Up Market Speculation Around Rate ExpectationsA once tepid fundamental scenario for the Euro has seen a serious upgrade recently: a burgeoning expectation that the European Central Bank (ECB) will cut rates at next Thursday’s monetary policy meeting. This outlook seems rooted more amongst the economist class rather than speculators however. Looking at the consensus outlook gathered by Bloomberg, there are currently 21 bank economists that expect a 25 bp cut to 0.50 percent versus 15 that expect no change. That is dramatically different than the expectations heading into the last meeting which saw a 2 and 54 split respectively. The dovish view seems to have metastasized quickly following the poor showing in German PMI and business sentiment data. And yet, the market still shows little expectation of the same through swaps. Will the market catch up or ignore this drive?

Australian Dollar: RBA Announces FX Diversification, Rate Outlook Falling

In the wake of the first quarter Australian CPI (Consumer Price Index) figures, we find the market’s expectations for a dovish bearing for the Reserve Bank of Australia (RBA) have in fact intensified. While the inflation figures missed the market consensus, that still seems remarkable given that the headline, year-over-year figure (which central bank’s use to assess medium-term policy) climbed to 2.5 percent. The core – or ‘Trimmed’ – figure did unexpectedly cool, which may reflect expectations for volatile components to ease soon. Nevertheless, the 12-month rate forecast measured through swaps is at a 3-month low – expectations of 53 bps of easing. Meanwhile, the RBA also announced it would look to diversify five percent of its FX reserves into Chinese assets. This reflects a stronger tie between the nations moving forward.

New Zealand Dollar Manages to Hold Gains after RBNZ Hold

Just yesterday, the Reserve Bank of New Zealand announced that it had held the nation’s benchmark lending rate unchanged at 2.50 percent. That outcome came as little surprise to either the market or economists, but there was nevertheless some early dispute about what and when the central bank’s next move would be. Central bank Governor Wheeler’s comment that growth has improved seems to have garnered far more attention than the remark that rates will be held unchanged through 2013 and that the high currency is a overvalued and a ‘significant headwind’. Ultimately, the market found its expectations met and the rate outlook remains unchanged – a 40 percent chance of a 25bp hike next April – but the kiwi still gained ground and held onto the move. Pair’s like NZDUSD aren’t necessarily overbought, but those like NZDCHF may be.

Gold: Stories of Physical Demand Contrast Sharp Drop in Trading

There have been plenty of stories in the financial headlines related to a surge in demand for physical gold that has sprung out of the metal’s 15 percent tumble below $1,500 (and the 26 percent overall drop since October’s high). In addition to stories of heavy interest in Asia and a recent surge for coins at the UK Royal Mint, we learned from the US Mint that gold coin sales so far this month topped 196,500 ounces – the strongest month since April 2009. That is certainly a strong showing, but we need to put it into perspective. When we look at ETF holdings of the precious metal so far this month, selling equates to 4.85 million ounces or 6.2 percent. Gold is only ‘cheap’ if it is indeed going to climb. Bulls have yet to retake $1,450 – much less the $1,525 break level – and we’ve long ago priced in central bank stimulus from the likes of the Fed and BoJ…

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

8:30

GBP

Index of Services (MoM)

0.20%

0.30%

Unexpected cold weather in Q1weighted on retail and industrial sectors, thus decreasing productivity and exacerbating the austerity effect on consumer spending.

8:30

GBP

Index of Services (3Mo3M)

-0.10%

-0.20%

8:30

GBP

Gross Domestic Product (QoQ)

0.10%

-0.30%

8:30

GBP

Gross Domestic Product (YoY)

0.40%

0.20%

12:30

USD

Initial Jobless Claims

350K

352K

Highest in 2M; 4W moving average (361)shows 5W uptrend

12:30

USD

Continuing Claims

3055K

3068K

Previous decline does not include Americans with extend benefits under federal programs.

15:00

USD

Kansas City Fed Manf. Activity

-5

Remained negative for 6M.

22:45

NZD

Trade Balance (New Zealand dollars)

470M

414M

Strong kiwi supported by risk appetite may hurt export and recent drought may increase demand for certain imported food items, thereby leading to deficit.

22:45

NZD

Exports (New Zealand dollars)

4.28B

3.91B

22:45

NZD

Imports (New Zealand dollars)

3.82B

3.49B

22:45

NZD

Balance (YTD) (New Zealand dollars)

-883M

-1082M

23:15

JPY

Nomura/JMMA Manufacturing Purchasing Manager Index

50.4

Composite indicator for manufacturing sector; Pierced above expansionary after 9M in contraction.

23:30

JPY

National CPI (YoY) (APR)

-0.8%

-0.7%

Lower consumer prices may suggest BoJ not able to achieve its 2% inflation target rate within 2 years, confidence may weaken.

23:30

JPY

National CPI Ex Food (YoY)

-0.4%

-0.3%

23:30

JPY

National CPI Ex Food, Energy (YoY)

-0.8%

-0.9%

GMT

Currency

Upcoming Events & Speeches

3:45

JPY

Japan to Sell 2-Year Notes

7:30

EUR

EU’s Rehn Speaks on European Single Market

10:00

EUR

German Gov’t Releases New Economic Forecasts

12:30

EUR

ECB’s Coeure and Portugal FM Gaspar Speak on Euro Single Market

17:00

USD

US to Sell $29 Bln in 7-Year Notes

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

15.0000

2.0000

9.8365

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

9.5500

7.8075

1.3250

Resist 1

6.8155

5.8300

5.8620

Spot

12.1752

1.7929

9.0974

7.7651

1.2401

Spot

6.4509

5.7383

5.7299

Support 1

12.0470

1.6500

8.7750

7.7490

1.2000

Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.5650

7.7450

1.1800

Support 2

5.8085

5.4440

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

1.3101

1.5448

98.87

0.9419

1.0242

1.0460

0.8510

128.69

151.42

Resist. 2

1.3074

1.5420

98.54

0.9400

1.0226

1.0441

0.8490

128.21

150.95

Resist. 1

1.3046

1.5392

98.22

0.9382

1.0209

1.0422

0.8471

127.74

150.48

Spot

1.2991

1.5336

97.57

0.9344

1.0176

1.0383

0.8432

126.79

149.55

Support 1

1.2936

1.5280

96.92

0.9306

1.0143

1.0344

0.8393

125.84

148.61

Support 2

1.2908

1.5252

96.60

0.9288

1.0126

1.0325

0.8374

125.37

148.15

Support 3

1.2881

1.5224

96.27

0.9269

1.0110

1.0306

0.8354

124.89

147.68

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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25 April 2013 02:53 GMT