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FOREX: Dollar Losing Its Footing without Follow Through on Friday’s S&P 500 Selloff

FOREX: Dollar Losing Its Footing without Follow Through on Friday’s S&P 500 Selloff

2011-02-01 02:36:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Losing Its Footing without Follow Through on Friday’s S&P 500 Selloff
  • British Pound Surge on BoE Member’s Hawkishness will Quickly Fade
  • Australian Dollar: AUDUSD Fails to Overtake Parity Immediately after RBA Hold
  • Euro Advances on Accelerated Inflation Report, Market Overlooks Financial Concerns
  • Canadian Dollar Steady as Firm Growth Reading Offsets Officials’ Efforts to Talk Down Currency
  • New Zealand Dollar Weighed Under Surprising Drop in Building Permits and Trade Data

Dollar Losing Its Footing without Follow Through on Friday’s S&P 500 Selloff

The dollar was presented with a tremendous opportunity through the end of last week. EURUSD signaled its readiness to reverse the pair’s substantial advance over the preceding three weeks with a sharp correction through Friday’s close. The artificially inflated strength of the euro-area currency was one potential catalyst for this particular pair; but the true potential for the greenback rests with risk appetite trends which play to the benchmark’s safe haven status. As such, we need look beyond the market’s most liquid exchange rate and reference the underlying fundamental trends to establish the dollar’s underlying performance. On that note, we make the allusion to the S&P 500’s tentative bull-trend break this past Friday. As the retail trader’s primary investment class, stocks provide a good measure for risk appetite as this group typically positions according to their emotions. Yet, Monday proved there was no immediate follow through on that important channel break. That is not particularly surprising as a major trend change often requires substantial fundamental encouragement to secure follow through. And, as for the dollar itself, we should note that the remarkable dollar-positive move on Friday didn’t exactly translate into a major reversal opportunity for any pair other than EURUSD. Looking across the majors, no other pair put up as meaningful a greenback advance.

At this point, we have the spark; but we are lacking the necessary fuel for ignition. For the dollar to find its footing, it will need to see unequivocal support through one of its primary fundamental themes. Relative economic performance is one of those potential catalysts; but it is difficult to find a dramatic shift in growth expectations given how broad a picture it is and how slowly the data develops. Nonetheless, we note Monday’s data economic performance-based data was an encouraging follow up to last week’s robust 4Q GDP reading. The top headline on the round of releases was the personal spending and income data for December. Wage growth of 0.4 percent was in line with expectations and paints an encouraging compliment to the employment picture. Far more remarkable though is the consumption measure as consumer spending accounts for approximately three-quarters of US GDP. That said, the 0.7 percent climb was just off the best showing for the series since August 2009. Adding to this impressive reading was the Chicago-area PMI factory activity report which happened to advance to its highest reading since 1998.

Altogether, it would seem that the growth picture would leverage the dollar’s relative strength against its counterparts. However, such a simple academic approach doesn’t hold water in a dynamic market. While the data does raise the greenback’s profile, it doesn’t yet overcome the currency’s branding as a safe haven. Thereby, a strong showing from the data actually works against the dollar as equities are temporarily bolstered by the updates. What’s more, another reading to accompany the income and spending data was the personal consumption expenditure (PCE) data – the Fed’s favored inflation measure. And, with the yearly core data slowing to its weakest pace on records (back to 1959); the dollar is inadvertently anchored to its unfavorable correlation to risk appetite trends. Therefore, we await the inevitable correction in overextended risk appetite trends or at least a meaningful reversal in the euro’s climb this past month.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: EURUSD and GBPUSD Offer the Same Oversold Feeling

British Pound Surge on BoE Member’s Hawkishness will Quickly Fade

The British pound was the top performer Monday despite a relatively flimsy fundamental picture. Without scheduled event risk, the market was taking note of Bank of England member Weale’s comments as well as a quarterly report from Rightmove on the condition of the housing market. The latter offering showed only 28 percent of respondents saw home prices rising over the coming year. Far more market-moving though were the central banker’s comments. Taking a more hawkish stance than even Andrew Sentance, Weale stated outright that there was a “powerful case” for near-term interest rate hikes to avoid lasting inflation troubles. This certainly adds a hawkish voice to the MPC; but gaining a majority to vote this way while growth is seen slowing going forward is another matter entirely. The sterling’s rally Monday was somewhat excessive given the influence the fundamental catalyst truly has. If the upcoming factory activity and finance figures don’t support it, the rally will likely stall.

Australian Dollar: AUDUSD Fails to Overtake Parity Immediately after RBA Hold

Considering the Australian dollar is at the top of the interest rate curve, there is a heightened interest surrounding developments to the yield. Then again, this same status increases the efficiency with which the market prices in interest rate expectations. For that reason, the RBA’s rate decisionprovided little impetus for a meaningful price development Tuesday morning. The suggestion that inflation was consistent with the medium-term target despite flood implications curbed expectations they would quicken; but that was a mild event risk.

Euro Advances on Accelerated Inflation Report, Market Overlooks Financial Concerns

Despite rumors that the EU is discussing a potential restructuring of Greece’s debts and the German Finance Minister was putting up road blocks for an expansion of the region’s bailout efforts, the euro still managed to climb Monday. The strongest Euro Zone CPI estimate reading since October 2008 certainly helped things along. Tomorrow, we get German employment figures and then Wedensday’s Portugal bond sale.

Canadian Dollar Steady as Firm Growth Reading Offsets Officials’ Efforts to Talk Down Currency

Monthly GDP readings are unique; and for the Canadian dollar, they lend little impetus for volatility. According to Stats Canada, the economy grew 0.4 percent in November (greater than expected and the fastest pace since March). Alternatively, the year-over-year figure was running at its slowest clip since February. Without a hawkish BoC, this data gains little traction. Now we look forward to Friday’s labor data.

New Zealand Dollar Weighed Under Surprising Drop in Building Permits and Trade Data

The New Zealand dollar was struggling to take advantage of the bounce in risk appetite that developed to start the week. Holding the kiwi back was a round of disappointing data. While this morning’s wage growth figures were in line, it was Monday morning’s surprise 18.6 percent drop in building permits and a NZ$250 million deficit that really caught the yield currency off guard. The data influence won’t last long though.

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

ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

AUD

22:30

AiG Performance of Manufacturing Index (JAN)

46.3

December reading was lowest in a year.

AUD

0:30

NAB Business Confidence (DEC)

6

Australian business confidence fell in November for a third straight month.

AUD

0:30

NAB Business Conditions (DEC)

4

AUD

0:30

House Price Index (QoQ) (4Q)

-0.2%

0.1%

Australian home prices likely fell in 4Q for the first time since 1Q 2009.

AUD

0:30

House Price Index (YoY) (4Q)

5.6%

11.5%

CNY

1:00

Purchasing Manager Index Manufacturing (JAN)

53.5

53.9

December reading was a 3-month low.

JPY

1:30

Labor Cash Earnings (YoY) (DEC)

1.0%

0.2%

Labor earnings rose in the last 9 months.

NZD

2:00

ANZ Commodity Price (JAN)

2.0%

Prices rose nearly 9% in last 4 months of 2010.

AUD

3:30

Reserve Bank of Australia Interest Rate Decision

4.75%

4.75%

Market implies no chance of rate hike.

JPY

5:00

Vehicle Sales (YoY) (JAN)

-28.3%

Sales fell YoY in the last four months.

AUD

5:30

RBA Commodity Price Index (JAN)

94.6

RBA commodity index has held above 90 in the last eight months.

AUD

5:30

RBA Commodity Price Index SDR (YoY) (JAN)

47.7%

GBP

7:00

Nationwide House Prices s.a. (MoM) (JAN)

-0.4%

0.4%

U.K. nationwide home prices increased in December for the first time since May.

GBP

7:00

Nationwide House Prices n.s.a. (YoY) (JAN)

-1.0%

0.4%

CHF

8:15

Retail Sales (Real) (YoY) (DEC)

1.8%

Retail sales rose YoY in last 12 months.

CHF

8:30

SVME-Purchasing Managers Index (JAN)

59.2

59.6

Sub-60 reading in 3 of the past 4 months.

EUR

8:45

Italian Purchasing Manager Index Manufacturing (JAN)

54.6

54.7

Europe’s manufacturing industries expanded faster than forecast in December, led by strong growth in Germany.

EUR

8:50

French Purchasing Manager Index Manufacturing (JAN F)

54.3

54.3

EUR

8:55

German Purchasing Manager Index Manufacturing (JAN F)

60.2

60.2

EUR

8:55

German Unemployment Change (JAN)

-10K

3K

Unemployment rose in Germany in December for the first time since 2009.

EUR

8:55

German Unemployment Rate s.a. (JAN)

7.5%

7.5%

EUR

9:00

Italian Unemployment Rate s.a. (DEC P)

8.7%

8.7%

Likely held at 8.7% for a third month.

EUR

9:00

Euro-Zone Purchasing Manager Index Manufacturing (JAN F)

56.9

56.9

Fell from December’s 8-month high.

GBP

9:30

Purchasing Manager Index Manufacturing (JAN)

58.0

58.3

At highest level since survey began in ’06.

GBP

9:30

Mortgage Approvals (DEC)

46.5K

48.0K

November reading was a four-month high.

GBP

9:30

Net Consumer Credit (DEC)

0.0B

-0.1B

Net consumer credit was negative in November for the first time in 5 months.

GBP

9:30

Net Lending Sec. on Dwellings (DEC)

0.6B

0.8B

GBP

9:30

M4 Money Supply (MoM) (DEC)

-0.8%

U.K. M4 money supply declined in November by the most since a 1.0% decrease in December 2009.

GBP

9:30

M4 Money Supply (YoY) (DEC)

-1.4%

GBP

9:30

M4 Money Supply ex OFCs (Annualised) (3M) (DEC)

3.5%

EUR

10:00

Euro-Zone Unemployment Rate (DEC)

10.1%

10.1%

Double-digit reading in the last 8 months.

USD

15:00

Construction Spending (MoM) (DEC)

0.1%

0.4%

Likely rose in December for fourth month.

USD

15:00

ISM Manufacturing (JAN)

58.0

58.5

December’s manufacturing reading was the highest since April.

USD

15:00

ISM Prices Paid (JAN)

73.5

72.5

EUR

17:00

Italian New Car Registrations (YoY) (JAN)

-21.7%

Declined YoY in the last nine months.

EUR

18:00

Italian Budget Balance (euros) (JAN)

9.1B

Italy posted a budget surplus in December for just the fourth month of 2010.

EUR

18:00

Italian Budget Balance (euros) (YTD) (JAN)

-67.5B

USD

22:00

ABC Consumer Confidence (JAN 30)

-44

Confidence fell in the last two weeks.

USD

22:00

Domestic Vehicle Sales (JAN)

9.55M

9.46M

Domestic vehicle sales rose in December to their highest level since August 2009.

USD

22:00

Total Vehicle Sales (JAN)

12.60M

12.53M

Currency

GMT

Upcoming Events & Speeches

EUR

15:00

ECB President Jean-Claude Trichet Speaks on European Economy

EUR

16:30

ECB's Ewald Nowotny Speaks on European Economy

CAD

19:15

BoC's Tiff Macklem Speaks on Canadian Economy

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.3885

1.6420

89.00

1.0000

1.0922

1.0600

0.8230

127.60

146.05

Resist 1

1.3750

1.6034

86.00

0.9775

1.0750

1.0200

0.8000

120.00

140.00

Spot

1.3687

1.6016

82.10

0.9442

1.0017

0.9967

0.7715

112.36

131.48

Support 1

1.3425

1.5312

80.00

0.9300

0.9800

0.9600

0.6850

103.80

125.00

Support 2

1.2900

1.5186

75.00

0.9000

0.9700

0.9375

0.6585

100.00

119.00

CLASSIC SUPPORT AND RESISTANCE EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.8500

1.6575

7.4025

7.8165

1.4945

Resist 2

7.7500

5.7800

6.2750

Resist 1

12.5000

1.6300

7.2825

7.8075

1.4655

Resist 1

7.5800

5.6625

6.1150

Spot

12.1391

1.6040

7.1820

7.7971

1.2789

Spot

6.4508

5.4459

5.7790

Support 1

11.7200

1.5300

6.9900

7.7490

1.2750

Support 1

6.2850

5.2625

5.7030

Support 2

11.4400

1.4725

6.8000

7.7450

1.2500

Support 2

6.1250

5.1000

5.5200

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.3835

1.6189

82.53

0.9500

1.0108

1.0064

0.7772

113.53

132.81

Resist 1

1.3761

1.6103

82.31

0.9471

1.0062

1.0016

0.7744

112.95

132.14

Pivot

1.3666

1.5962

82.05

0.9420

1.0013

0.9941

0.7714

112.11

130.94

Support 1

1.3592

1.5876

81.83

0.9391

0.9967

0.9893

0.7686

111.53

130.27

Support 2

1.3497

1.5735

81.57

0.9340

0.9918

0.9818

0.7656

110.69

129.07

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

1.3866

1.6187

82.99

0.9558

1.0120

1.0102

0.7822

113.81

133.11

Resist. 2

1.3821

1.6144

82.77

0.9529

1.0094

1.0068

0.7795

113.45

132.70

Resist. 1

1.3777

1.6101

82.55

0.9500

1.0068

1.0035

0.7769

113.09

132.30

Spot

1.3687

1.6016

82.10

0.9442

1.0017

0.9967

0.7715

112.36

131.48

Support 1

1.3597

1.5931

81.65

0.9384

0.9966

0.9899

0.7661

111.63

130.66

Support 2

1.3553

1.5888

81.43

0.9355

0.9940

0.9866

0.7635

111.27

130.26

Support 3

1.3508

1.5845

81.21

0.9326

0.9914

0.9832

0.7608

110.91

129.85

v

Written by: John Kicklighter, Currency Strategist for DailyFX.com

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

http://www.dailyfx.com/calendar

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