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Forex: Dollar Sees mixed performance as Bernanke Fails to Keep the Hawkish Momentum Going

Forex: Dollar Sees mixed performance as Bernanke Fails to Keep the Hawkish Momentum Going

2011-02-10 05:54:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Sees mixed performance as Bernanke Fails to Keep the Hawkish Momentum Going
  • British Pound: Setting up the Trading Scenarios for the BoE Rate Decision
  • Euro: What Does ECB Member Axel Weber’s Retirement Mean for the Shared Currency?
  • Australian Dollar Sees a Sharp Burst of Volatility but Fails for Direction after Jobs Data
  • Japanese Yen Confronts a Rise in Upstream Inflation though Rate Hikes not a Concern
  • New Zealand Dollar Traders Skeptical of Finance Minister’s Economic Warnings

Dollar Sees mixed performance as Bernanke Fails to Keep the Hawkish Momentum Going

The dollar’s performance through Wednesday’s session probably seemed straightforward to the uninitiated trader. The Dollar Index dropped for a second day to further pull the currency back from two-week highs. Yet, we need to remember composition of this particular gauge. EURUSD makes up the vast majority of the Index; and that particular pair presented a stand-out performance amongst the majors with the biggest rally in a week. For the rest of the majors (aside from USDCHF, which was overdue for a correction after five consecutive days of advance), the greenback was showing a more reserved pace split between gains and declines. What’s more, we see that the dollar gained against its high-yield counterparts (the Australian and New Zealand dollars) but also lost ground against the fundamentally-volatile sterling. What does tell us? This suggests that the currency and underlying investor interests are generally anchored – awaiting the critical driver that will revive conviction through momentum firm up correlations.

If we want to talk about the catalyst that can exact the greatest influence over the dollar (and generally the broader financial market) while representing the most immediate threat to stability, our focus will always come back to risk appetite trends. The S&P 500 as our proxy for investor sentiment posted a very modest 0.28 percent loss for the day that mirrored the European market before it and transferred to the opening activity of the Asian session after it. This is likely where the dollar’s measured advance against the Aussie and Kiwi dollars originated. Looking for a catalyst for sentiment and investor sentiment through the day, the ongoing Fed chatter that picked up steam the previous session presented the best opportunity. That said, the rhetoric offered by Fed Chairman Ben Bernanke and New York Fed Vice President Brian Sack did little to further the hawkish lean that Lacker, Fisher and to an extent Lockhart offered. With traders looking specifically at commentary directed at the timing to the eventual withdrawal of stimulus, we note that Chairman Bernanke remarked that should the economy grow “very quickly” and inflation persist, the group may call an early end and withdrawal of the stimulus. This is a significant set of contingencies; but this reminds the masses that this is a ‘set and forget’ program. He stated as much in his suggestion that the FOMC takes “very seriously” the review of its programs at each meeting. Other than this highlight, Bernanke maintained his cautious outlook that the jobless rate will remain elevated.

As for Brian Sack, the man responsibility for the irregular market operations proposed that the increase in long-term interest rates is evidence that the perception of the US economy is improving and that the stimulus programs played a significant role in this recovery. A rise in long-term yields is often associated with a drop in demand for the safe haven asset and concern of higher rates; but it could also reflect a general concern with US debt as the deficit ceiling nears and investors are becoming more addicted to the returns of capital markets that are inadvertently bolstered by government support (moral hazard). On the topic of rates, the US auctioned $24 billion in 10-year Treasuries and saw a record 71 percent go to indirect bids (particularly foreign central banks) while direct bids (US investors, money managers) were virtually non-existent. This is an interesting gauge of global perception for the US and its assets (under normal conditions – which we aren’t experiencing now).

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Market Conditions Setup EURJPY and AUDCAD, Not EURUSD

British Pound: Setting up the Trading Scenarios for the BoE Rate Decision

Speculators have greater concerns at the momentum than regular fundamental data. Wednesday’s trading session brought with it the release of the December visible trade balance which unexpectedly printed its largest deficit on record at 9.247 billion pounds. Normally, this would have been recent to unload the sterling – especially given the economy’s dependence on capital inflows with the current uncertainty surrounding growth. Yet, with the BoE rate decision scheduled tomorrow, traders are distracted. While austerity is threatening to pull down an already struggling recovery, market participants are nonetheless convinced the central bank is on the path to a near-term rate hike. That is highly unlikely for the upcoming meeting – just as surely as they will not change the bond purchasing program or release a statement. That said, should any of these items in fact occur; the pound reaction will be dramatic. Without them, speculation will still prevail but at a more restrained pace.

Euro: What Does ECB Member Axel Weber’s Retirement Mean for the Shared Currency?

The euro is simply cruising. Since the EU has deferred the tough decisions to March, the specter of a financial crisis has been pushed back. Next on the list though is interest rate speculation. On this front we had a dovish update when the news circulated that ECB Member Axel Weber was dropping out of the running to head up the central bank. A staunch hawk, this could very well curb the pace of rate hikes going forward.

Australian Dollar Sees a Sharp Burst of Volatility but Fails for Direction after Jobs Data

Next to the pound, the Aussie dollar held the greatest potential for volatility in its scheduled event risk: the January employment data. The headline figure far outpaced expectations and the jobless rate held low at 5.0 percent; but the details kept the currency anchored. With an 8,000 net contraction in full-time jobs; this data really doesn’t tout the necessary optimism to offset the flood, Chinese and rate concerns.

Japanese Yen Confronts a Rise in Upstream Inflation though Rate Hikes not a Concern

The Japanese yen is simply assumed to be the ultimate funding currency; but this is not a permanent state. Eventually, interest rates in Japan will rise (though they haven’t really in nearly two decades). It is noteworthy that the DCGPI figures (factory level inflation gauge) reported annual price growth of 1.6 percent – a 26-month high. Yet, this is far from trickling down to the consumer and wiping out deflation.

New Zealand Dollar Traders Skeptical of Finance Minister’s Economic Warnings

Yesterday, New Zealand’s Finance Minister sent out that warning that there was a good chance the country fell into recession in the second half of last year. And yet, the kiwi dollar held its ground. Speculators may see this less as a genuine warning rather than ‘jawboning’ or they may simply not see it as an impediment to interest rates. Either way, they do not appreciate the pain this could cause in the future.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**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

JPY

23:50

Machine Orders (MoM) (DEC)

5.0%

-3.0%

Rose by 1.7% MoM and fell by 1.6% YoY

JPY

23:50

Machine Orders (YoY) (DEC)

2.2%

11.6%

JPY

23:50

Domestic Corporate Goods Price Index (MoM) (JAN)

0.3%

0.4%

Rose by 0.5% MoM and rose by 1.6% YoY

JPY

23:50

Domestic Corporate Goods Price Index (YoY) (JAN)

1.4%

1.2%

JPY

23:50

Housing Loans (YoY) (4Q)

3.6%

Rose by 3.2% YoY

AUD

0:30

Employment Change (JAN)

17.5K

1.8K

Employment rose by 24K; unemployment rate was steady at 5%; full-time employment fell by 8K; part-time employment rose by 32; participation rate rose to 65.9%

AUD

0:30

Unemployment Rate (JAN)

5.0%

5.0%

AUD

0:30

Full Time Employment Change (JAN)

0.2K

AUD

0:30

Part Time Employment Change (JAN)

1.6K

AUD

0:30

Participation Rate (JAN)

65.8%

65.8%

GBP

NIESR Gross Domestic Product Estimate (JAN)

0.5%

Growth 0.4%-0.6% for last 3 quarters

CHF

6:45

Consumer Confidence (JAN)

10

7

Confidence back to pre-recession levels

EUR

7:45

French Industrial Production (MoM) (DEC)

-0.3%

2.3%

Industrial and manufacturing production expected to slip after robust growth last month, but overall trend is positive as seen from year-over-year figures

EUR

7:45

French Manufacturing Production (MoM) (DEC)

-0.2%

2.2%

EUR

7:45

French Industrial Production (YoY) (DEC)

5.7%

6.0%

EUR

7:45

French Manufacturing Production (YoY) (DEC)

6.0%

5.1%

CHF

8:15

Consumer Price Index (YoY) (JAN)

0.6%

0.5%

Only been one positive MoM increase in four months; no urgency for rate hikes

CHF

8:15

Consumer Price Index (MoM) (JAN)

-0.2%

0.0%

EUR

9:00

Italian Industrial Production s.a. (MoM) (DEC)

0.2%

1.1%

Recovery not as robust as that in France, but overall trend is the same

EUR

9:00

Italian Industrial Production w.d.a. (YoY) (DEC)

4.5%

4.1%

EUR

9:00

Italian Industrial Production n.s.a. (YoY) (DEC)

4.1%

EUR

9:00

ECB Publishes Monthly Report (FEB)

Insight into future monetary policy

GBP

9:30

Industrial Production (MoM) (DEC)

0.5%

0.4%

Industrial production has been growing on a year-over-year basis since March, 2010; manufacturing growing since Feb, 2010

GBP

9:30

Industrial Production (YoY) (DEC)

3.7%

3.3%

GBP

9:30

Manufacturing Production (MoM) (DEC)

0.4%

0.6%

GBP

9:30

Manufacturing Production (YoY) (DEC)

5.4%

5.6%

GBP

12:00

Bank Of England Asset Purchase Target

200B

200B

No changes expected

GBP

12:00

Bank of England Rate Decision

0.5%

0.5%

CAD

13:30

New Housing Price Index (MoM) (DEC)

0.2%

0.3%

USD

13:30

Continuing Claims

3900K

3925K

Trend remains lower, but improvement has been very gradual

USD

13:30

Initial Jobless Claims

410K

415K

USD

15:00

Wholesale Inventories (DEC)

0.7%

-0.2%

First decline in 11 months in December

USD

19:00

Monthly Budget Statement (JAN)

-$55.0B

-$42.6B

Deficits as far as the eye can see

Currency

GMT

Upcoming Events & Speeches

USD

22:45

NY Fed's Sack to Speak about QE2 in Philadelphia

USD

17:45

Fed's Lockhart Speaks on Panel on Debt

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

1.4025

1.6420

89.00

1.0000

1.0922

1.0600

0.8230

127.60

146.05

Resist 1

1.3875

1.6300

86.00

0.9775

1.0750

1.0200

0.8000

120.00

140.00

Spot

1.3623

1.6061

82.36

0.9639

0.9961

1.0146

0.7743

112.20

132.28

Support 1

1.3425

1.5750

80.00

0.9300

0.9800

0.9600

0.6850

103.80

125.00

Support 2

1.2900

1.5315

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

12.0437

1.5754

7.1813

7.7826

1.2724

Spot

6.4370

5.4726

5.7748

Support 1

11.7200

1.5300

6.9900

7.7490

1.2700

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

1.3745

1.6219

82.83

0.9720

1.0045

1.0224

0.7834

112.75

133.60

Resist 1

1.3684

1.6140

82.59

0.9679

1.0003

1.0185

0.7789

112.47

132.94

Pivot

1.3628

1.6084

82.19

0.9602

0.9936

1.0150

0.7742

112.04

132.26

Support 1

1.3567

1.6005

81.95

0.9561

0.9894

1.0111

0.7697

111.76

131.60

Support 2

1.3511

1.5949

81.55

0.9484

0.9827

1.0076

0.7650

111.33

130.92

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

1.3788

1.6228

83.24

0.9750

1.0057

1.0277

0.7845

113.61

133.87

Resist. 2

1.3746

1.6186

83.02

0.9723

1.0033

1.0244

0.7820

113.26

133.48

Resist. 1

1.3705

1.6145

82.80

0.9695

1.0009

1.0212

0.7794

112.91

133.08

Spot

1.3623

1.6061

82.36

0.9639

0.9961

1.0146

0.7743

112.20

132.28

Support 1

1.3541

1.5977

81.92

0.9583

0.9913

1.0080

0.7692

111.49

131.48

Support 2

1.3500

1.5936

81.70

0.9555

0.9889

1.0048

0.7666

111.14

131.08

Support 3

1.3458

1.5894

81.48

0.9528

0.9865

1.0015

0.7641

110.79

130.69

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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