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Forex: Dollar Puts in an Unconvincing Bullish Close as Risk Trends Once again Waver

Forex: Dollar Puts in an Unconvincing Bullish Close as Risk Trends Once again Waver

2011-03-08 04:43:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Puts in an Unconvincing Bullish Close as Risk Trends Once again Waver
  • Euro Financial Troubles Growing More Prominent and Immediate, Reversal Soon at Hand
  • British Pound Traders Counting Dow the Days to the BoE’s Rate Decisions
  • New Zealand Dollar and RBNZ Reminded of Fiscal Impact of Earthquake by Treasury
  • Australian Dollar Unfazed by Improvement in Construction and Business Confidence
  • Japanese Yen Stability Should be Questioned with FX Volatility at 30-Month Low

Dollar Puts in an Unconvincing Bullish Close as Risk Trends Once again Waver

The US dollar – on a trade-weighted basis – put in for its first bullish close Monday in four active trading days. Yet, this was far from a convincing advance for the reserve currency as it dipped to a four-month low before clawing its way back for a positive close; and at the end of the day, the pained trend of the past three weeks is still firmly in place. The absence of a strong recovery is not all that surprising when we consider the lack of fundamental support for a development that would essentially oppose the prevailing trend of the past couple months (and really the past 10 years). For economic data on the day, we were presented with two notable indicators. First up was the consumer credit report for January which seemed encouraging with a greater than expected $5.014 billion increase. Why is a boost in credit supportive? In a macro-sense, it is like income or jobs growth – it encourages net consumption and helps fortify growth. However, considered revolving credit (like credit cards) spending dropped $4.2 billion and non-revolving credit was specifically bolstered by a $24.9 billion pick-me-up from the government, it is hard to see the true support in this data. Even less encouraging was the February budget report. The $223 billion deficit was the biggest monthly shortfall on record, adding to that nagging background concern that of long-term budget problems weighing on the US sovereign rating.

Despite the data, the real fundamental drive for the dollar still rests with the thematic intangibles: interest rate speculation and risk appetite trends. Fed Presidents Fisher (Dallas) and Lockhart (Atlanta) kept the confusion going. Dallas said he could vote for an early exit for the QE3 stimulus efforts if it become “counterproductive;” while Lockhart said they shouldn’t be so hasty to write off the need of further stimulus. It is hard for the market to benchmark a time frame for withdrawal with contradictory commentary like this. Carry far greater weight for the dollar traders in the short-term are risk trends. We learned this morning that Fitch is pricing in a 60 percent chance of a Chinese banking crisis by 2012.

Related:Discuss the Dollar in the DailyFX Forum,

Euro Financial Troubles Growing More Prominent and Immediate, Reversal Soon at Hand

There is a lot to be said about the influence of speculation on the value of any asset. It is true that the markets are extremely efficient at pricing in known data; but rarely is it a consistent change in the background fundamentals of a market or economy that feeds a consistent trend from day to day. Rather, the collective forecast for changes amongst the highly speculative crowd plays to each trader’s inherent balance of fear and greed. It is this distinction that must be made with the euro when plotting out the possibilities for direction and momentum. On the one hand, bulls are still riding high off the ECB’s efforts to advertise what is for all intents and purposes a guaranteed hike at the April policy gathering. This certainly moved up the time table that many had laid out; but it didn’t drastically alter the 12 month forecast. What was essentially was an outlook for four quarter-point hikes has been boosted up to five. That means, it is very likely that after that first hike, there will be a pause. Are market participants pricing in that more sensible possibility or are they stretching the possibilities to squeeze gains from the euro?

While we wait for that modest boost in return from the euro, the evidence of financial instability in the Euro-region continues to blossom. Though it didn’t instigate much in the way of surprise, Greece was downgraded three notches by Moody’s to B1. Regardless of what the Greek Finance Ministry says, the threat of default (or at least debt restricting) is exceptionally high; but the market continues to push this concern in the back of their mind. Perhaps Fitch’s lowering of Spain’s outlook to ‘Negative’ this past weekend is a little more remarkable. If not, the Thursday deadline for the nation’s 17 cajas (savings banks) to meet raised capital ratios should be monitored. Furthermore, with Greece credit default swaps hitting a record after its downgrade, we also see the Portuguese 10-year government bond yield edging above the critical 7.5 percent level. The cracks are showing well before this Friday’s special EU summit. Will the markets even wait for their conclusions?

British Pound Traders Counting Dow the Days to the BoE’s Rate Decisions

We are closing in on the Bank of England’s rate decision on Thursday; and traders are no doubt running through the scenarios in their minds. A hike is really the only outcome that can meaningfully bolster the sterling. Otherwise, a hold will likely find the BoE holding to its policy of not releasing a statement when they leave policy undisturbed. That said, there will be another month before the central bank would likely weigh the necessity of tightening policy once again. That will draw a sharp contrast to the ECB’s accelerated time frame and wear on speculators’ already-frayed nerves. And, to make things just a little more difficult on the bullish outlook, the Treasury had announced it had elected Goldman Sachs’ Chief European Economist Ben Broadbent to replace MPC member Andrew Sentence at the end of his term on May 31st. If we don’t get a hike before then, the hawkish voice from the policy group will die down significantly.

New Zealand Dollar and RBNZ Reminded of Fiscal Impact of Earthquake by Treasury

The interest rate outlook has improved noticeably for the New Zealand dollar. While the market is still fully confident that a 25bps hike is due later this week, the 12-month forecast has recovered from -20 bps to positive 5 bps. That may be difficult to sustain though as the Treasury gave a dour update on the earthquake’s influence on finances. The group also projected a 1.5 percentage point draw on GDP due to this void.

Australian Dollar Unfazed by Improvement in Construction and Business Confidence

The Australian is simply drifting – neither encouraged nor weighed by its potential for economic activity and yield. This morning, the Aussie dollar absorbed the improvement in the NAB Business confidence figures for February to an 11-month high without so much as a short-lived rally. The same was true of the construction activity index. This currency is anchored to medium-term risk trends.

Japanese Yen Stability Should be Questioned with FX Volatility at 30-Month Low

The Japanese yen has shown relatively limited levels of activity – in fact the implied outlook for movement over the coming three months is at a three-year low. In fact, the volatility reading for the broader currency market is at its lowest level since August of 2008. This isn’t a reading to suggest direction so much as it is reason to worry about a dramatic return of volatility - though volatility usually jumps in bear markets.

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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

CHF

6:45

Unemployment Rate s.a. (FEB)

3.4%

3.5%

A 3.4% reading on the adjusted figure would be an April 2009 low.

CHF

6:45

Unemployment Rate (FEB)

3.7%

3.8%

EUR

7:30

Bank of France Business Sentiment (FEB)

110

110

Just off a decade high.

EUR

7:45

French Central Gov’t Balance (euros) (JAN)

-148.8B

Decembers deficit was the highest on records going back to 1997.

EUR

7:45

French Trade Balance (euros) (JAN)

-5.1B

-5.1B

December’s drop in EZ exports will need to be corrected to support growth.

EUR

11:00

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

2.5%

-3.4%

A volatile indicator for Germany; but one that predicates business confidence.

EUR

11:00

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

15.6%

19.7%

USD

12:30

NFIB Small Business Optimism (FEB)

95.0

94.1

An overlooked aggregate growth indicator, the NFIB is seen nothing a Dec 2007 high.

NZD

13:00

New Zealand Net Migration s.a. (JAN)

750

This reading predates February’s earthquake.

CAD

13:15

Housing Starts (FEB)

172.8K

170.4K

Though there is talk of a possible Canadian housing crisis; the data has not borne out this threat.

USD

15:00

IBD/TIPP Economic Optimism (MAR)

51.7

50.9

Monthly investor optimism reading set high given market uncertainties.

AUD

23:30

Westpac Consumer Confidence (MAR)

1.9%

Confidence has cooled in the wake of natural disasters, RBA hikes and global uncertainties.

AUD

23:30

Westpac Consumer Confidence Index (MAR)

106.6

JPY

23:50

Machine Orders (MoM) (JAN)

3.0%

1.7%

A key reading to benchmark manufacturing activity and exports.

JPY

23:50

Machine Orders (YoY) (JAN)

5.1%

-1.6%

GBP

0:01

BRC Shop Price Index (YoY) (FEB)

2.5%

Like most inflation indicators, this measure it at multi-year highs.

AUD

0:30

Home Loans (JAN)

0.0%

2.1%

Lending activity is critical to monitor for Australia as we track the detrimental influences of central bank rate hikes.

AUD

0:30

Investment Lending (JAN)

3.0%

AUD

0:30

Value of Loans (MoM) (JAN)

2.3%

Currency

GMT

Upcoming Events & Speeches

EUR

9:00

ECB's Ewald Nowotny Speaks on European Economy

EUR

10:00

Bundesbank Publishes Annual Report

EUR

10:00

Bank of Italy Publishes Lending/Bad Debt Report

EUR

13:00

ECB's Axel Weber Speaks on German Economy

JPY

16:00

BoJ Governor Masaaki Shirakawa Speaks on Monetary Policy

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

1.4280

1.6420

89.00

1.0000

1.0275

1.0600

0.8230

127.60

146.05

Resist 1

1.4025

1.6300

86.00

0.9775

1.0000

1.0200

0.8000

120.00

140.00

Spot

1.3971

1.6202

82.31

0.9265

0.9723

1.0116

0.7369

114.99

133.35

Support 1

1.3700

1.5750

80.00

0.9200

0.9700

0.9600

0.6850

103.80

125.00

Support 2

1.3450

1.5315

75.00

0.9000

0.9500

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

7.3500

7.8075

1.4655

Resist 1

7.5800

5.6625

6.1150

Spot

12.0424

1.5977

6.8786

7.7866

1.2657

Spot

6.3574

5.3379

5.5558

Support 1

11.7200

1.5300

6.7600

7.7490

1.2700

Support 1

6.2850

5.2625

5.5550

Support 2

11.4400

1.4725

6.5575

7.7450

1.2500

Support 2

6.1250

5.1000

5.5125

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

1.4068

1.6401

82.66

0.9299

0.9765

1.0226

0.7428

115.68

134.70

Resist 1

1.4019

1.6302

82.48

0.9282

0.9744

1.0171

0.7399

115.33

134.02

Pivot

1.3988

1.6242

82.22

0.9259

0.9722

1.0131

0.7372

114.95

133.48

Support 1

1.3939

1.6143

82.04

0.9242

0.9701

1.0076

0.7343

114.60

132.80

Support 2

1.3908

1.6083

81.78

0.9219

0.9679

1.0036

0.7316

114.22

132.26

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

1.4127

1.6357

83.14

0.9368

0.9807

1.0236

0.7462

116.34

134.89

Resist. 2

1.4088

1.6318

82.93

0.9343

0.9786

1.0206

0.7439

116.00

134.50

Resist. 1

1.4049

1.6279

82.72

0.9317

0.9765

1.0176

0.7416

115.66

134.12

Spot

1.3971

1.6202

82.31

0.9265

0.9723

1.0116

0.7369

114.99

133.35

Support 1

1.3893

1.6125

81.90

0.9213

0.9681

1.0056

0.7322

114.32

132.58

Support 2

1.3854

1.6086

81.69

0.9187

0.9660

1.0026

0.7299

113.98

132.20

Support 3

1.3815

1.6047

81.48

0.9162

0.9639

0.9996

0.7276

113.64

131.81

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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