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FOREX: Dollar Marks a Critical Break against the Euro but Follow through Requires a Bigger Shift

FOREX: Dollar Marks a Critical Break against the Euro but Follow through Requires a Bigger Shift

2011-03-11 07:34:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Marks a Critical Break against the Euro but Follow through Requires a Bigger Shift
  • Euro Finally Cracks Under the Pressure of Financial Strains after Spain is Downgraded
  • British Pound: An Uneventful BoE Rate Decision Roils the Speculative Markets
  • Canadian Dollar Faces Event-Based Volatility in Uncontested Employment Data
  • Japanese Yen Slides as Risk Trends Steady, Earthquake Shakes Tokyo
  • Australian Dollar Left Shaken after Disappointing Employment Report

Dollar Marks a Critical Break against the Euro but Follow through Requires a Bigger Shift

On a day that would hold two disappointing, scheduled economic indicators; the US dollar put in for a remarkable bullish move against many of its liquid counterparts. Though the extent of the currency’s advance was remarkable; it was the placement of the moves that really carried weight with the trading community. Technical traders would identify the first meaningful correction for EURUSD since the most recent rally began a month ago; confirmation that GBPUSD’s steadfast rising trend channel from last December finally collapsed; and the long over-due completion of a consolidation pattern on AUDUSD that was quickly approaching its terminus after months of chop. Many believe this forceful move from the greenback as all they need to confirm the currency has jumpstarted a meaningful bull trend. However, a breakout and trend are not the same the same event; and the former does not guarantee the latter. We have a strong technical push to support the dollar; but to feed its progress, there needs to be an active bid in the market. An objective evaluation of the dollar brings up few extraordinary traits. The most influential potential driver at this stage is a decisive shift in market-wide investor sentiment. As such, we will watch the S&P 500 and Dow Indexes closely.

In the meantime, should we pay heed to tangible fundamental developments? On the docket Friday, both the retail sales and University of Michigan consumer confidence reports will take the temperature of the vital consumer sector. Yet, real potential is in the bigger themes. That said, news that AIG is looking to repurchase $15.7 billion in toxic MBS reminds us stimulus is temporary and leverage is still hyper-extended.

Related:Discuss the Dollar in the DailyFX Forum,

Euro Finally Cracks Under the Pressure of Financial Strains after Spain is Downgraded

Arguably, the Euro-area’s financial outlook has been troubled by specific and vague threats since Greece was forced to take a bailout nearly a year ago. However, given enough time, the market can acclimate itself to almost any hardship. This was the case with the euro these past few months as policymakers made open-ended promises to expand its support of the region’s troubled performers and solidify the economic recovery. Without specific measures - and ignoring the consistent hard-line stance Germany has maintained against increasing its own costs in the scheme - the market has moved on to more fluid topics: like interest rate speculation. Speculation of a rate hike at the April meeting leverages the burden to undermine the euro’s strength; but fundamentals certainly seem to be making that effort.

Through the week there have been consistently disappointing headlines to weaken euro-bulls’ conviction (the Greek downgrade and Portugal’s disappointing bond auction among the highlights). However, Thursday’s developments certainly raised the bar. The most shocking development was Moody’s downgrade of Spain to Aa2. Compared to Portugal, Greece and Ireland; Spain is a far larger EU member. Furthermore, many believe that should the debt crisis spread fully to this particular country, the current effort to stabilize the Monetary Union will fall through. As such, Bank of Spain’s report that only 12 lenders (of 88 reviewed) would require a total of 15.2 billion euros in additional capital to stabilize the banking system. A far more grounded Moody’s has pegged the costs at 40 to 50 billion euros; while Standard & Poor’s says a baseline scenario would require 38 billion euros. Perhaps the most threatening development though was reports that German Chancellor Merkel vowed in a closed session with parliament that further concessions for Greece would only be made should the country sell off additional assets and Ireland only if it agreed to align its corporate tax to a regional standard. A special EU summit will be held over the final trading day of the week; but it has been said that restructuring and default would not be discussions on the agenda. And, if policy officials know they won’t be able to make headway in this meeting; it is likely that they will try to ‘buy more time’ for market stability by offering platitudes. Will the market fall for it?

British Pound: An Uneventful BoE Rate Decision Roils the Speculative Markets

When is a non-event a major market mover for the market? When speculation is pushing price far out of skew from what fundamentals would suggest is fair value. There was little doubt amongst economists and market participants alike that the Bank of England would hold the monetary policy line and keep its benchmark lending rate at 0.50 percent and the bond purchasing program at 200 billion pounds. However, given the sterling’s consistent appreciation these past few months against many of its counterparts, there was clearly a faction of the market that has positioned for the eventuality of that critical turn. Backed by expectations of approximately 85 basis points worth of rate hikes over the coming 12 months (measured before Thursday’s rate decision), there is significant capital looking to front-run the hawkish regime change. With this hold, the most speculative will be shaken out of their positions. Even the more committed will realize that there that a hike is at least another month away and more likely further out. With an economy that struggling with austerity and inflation biting the consumer, should the pound be so high?

Canadian Dollar Faces Event-Based Volatility in Uncontested Employment Data

The Canadian dollar was unable to maintain its counter-trend appreciation Thursday as a stalled oil advance evolved into a meaningful correction and a waver in risk appetite trends weighed the commodity currency. In the final trading session of the week, the currency will also have an internal catalyst to contend with. The labor data for February is unencumbered by its NFP counterpart this month - a volatility booster.

Japanese Yen Slides as Risk Trends Steady, Earthquake Shakes Tokyo

Just a few weeks ago, an earthquake destroyed New Zealand’s second largest city. With the tally on damage and loss of life from that natural disaster fresh in mind, the market was understandably shaken Friday by news of an 8.8 magnitude earthquake off in the northeast region of Japan. Initial assessments of damage from the quake and subsequent tsunami are unconfirmed; but markets are being cautious.

Australian Dollar Left Shaken after Disappointing Employment Report

The Thursday release of Australia’s February employment data required a measure of analysis. The headline figures were an immediate disappointment with the 10,100 net loss in jobs; but the significant increase in full-time jobs could have helped to offset the pressure. That said, with risk appetite contracting market-wide and RBA rate expectations anemic, it is easier for traders to see the disappointment.

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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

EUR

7:00

German Wholesale Price Index (MoM) (FEB)

1.2%

Upstream inflation prices are a better gauge for energy prices impact.

EUR

7:00

German Wholesale Price Index (YoY) (FEB)

9.4%

EUR

7:00

German Consumer Price Index (MoM) (FEB F)

0.5%

0.5%

Front line inflation figures carry far more weight now that the ECB seems to be on track to an April rate hike. That said, this indicator is diminished as a final reading.

EUR

7:00

German Consumer Price Index (YoY) (FEB F)

2.0%

2.0%

EUR

7:00

German CPI - EU Harmonised (MoM) (FEB F)

0.6%

0.6%

EUR

7:00

German CPI - EU Harmonised (YoY) (FEB F)

2.2%

2.2%

EUR

7:45

French Current Account (euros) (JAN)

-5.4B

The difference between EU and non-EU balances is a good gauge for the euro.

EUR

9:00

Italian GDP s.a. and w.d.a. (QoQ) (4Q F)

0.1%

0.1%

A final reading of Italian GDP is expected to maintain modest but positive growth.

EUR

9:00

Italian GDP s.a. and w.d.a. (YoY) (4Q F)

1.3%

1.3%

GBP

9:30

Producer Price Index Input n.s.a. (MoM) (FEB)

1.5%

1.7%

Inflation pressures are expected to accelerate further; and UK businesses are expected to more freely pass the burden on to the consumer. Speculation is now fully responsible for the pound until the next rate decision comes around.

GBP

9:30

Producer Price Index Input n.s.a. (YoY) (FEB)

14.4%

13.4%

GBP

9:30

PPI Output n.s.a. (MoM) (FEB)

0.6%

1.0%

GBP

9:30

Producer Price Index Output n.s.a. (YoY) (FEB)

5.2%

4.8%

GBP

9:30

PPI Output Core n.s.a. (MoM) (FEB)

0.4%

0.7%

GBP

9:30

PPI Output Core n.s.a. (YoY) (FEB)

3.4%

3.2%

CAD

12:00

Net Change in Employment (FEB)

23.5K

69.2K

Canadian employment is expected to expand at a more controlled pace than was reported in January. Nonetheless, supports underlying and stable growth.

CAD

12:00

Unemployment Rate (FEB)

7.7%

7.8%

CAD

12:00

Full Time Employment Change (FEB)

31.1K

CAD

12:00

Part Time Employment Change (FEB)

38.0K

CAD

12:00

Participation Rate (FEB)

67.0

USD

13:30

Advance Retail Sales (FEB)

0.9%

0.3%

Government flow of funds data showed an increase in consumer wealth in 4Q; but growth is based upon spending of that wealth.

USD

13:30

Retail Sales Less Autos (FEB)

0.6%

0.3%

USD

13:30

Retail Sales Less Auto & Gas (FEB)

0.4%

0.2%

USD

14:55

U. of Michigan Confidence (MAR P)

76.3

77.5

A vital gauge for spending intentions.

USD

15:00

Business Inventories (JAN)

0.7%

0.8%

Inventory building was a large component of previous growth; but the future?

Currency

GMT

Upcoming Events & Speeches

- -

-:-

EU Holds Special Summit on Competitiveness Pact

EUR

10:00

ECB's Lorenzo Bini Smaghi Speaks on European Debt Crisis

USD

13:30

Fed's William Dudley Speaks on U.S. 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

1.4280

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

1.3907

1.6203

82.69

0.9297

0.9687

1.0100

0.7375

115.00

133.98

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

11.9312

1.5803

6.8650

7.7864

1.2680

Spot

6.3236

5.3630

5.5716

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

1.3988

1.6299

83.10

0.9412

0.9737

1.0169

0.7457

115.51

134.69

Resist 1

1.3947

1.6251

82.89

0.9354

0.9712

1.0134

0.7416

115.25

134.33

Pivot

1.3902

1.6195

82.74

0.9312

0.9690

1.0098

0.7376

115.01

133.95

Support 1

1.3861

1.6147

82.53

0.9254

0.9665

1.0063

0.7335

114.75

133.59

Support 2

1.3816

1.6091

82.38

0.9212

0.9643

1.0027

0.7295

114.51

133.21

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

1.4065

1.6357

83.50

0.9402

0.9769

1.0222

0.7470

116.33

135.52

Resist. 2

1.4025

1.6318

83.30

0.9376

0.9748

1.0191

0.7446

116.00

135.14

Resist. 1

1.3986

1.6280

83.09

0.9349

0.9728

1.0161

0.7423

115.67

134.75

Spot

1.3907

1.6203

82.69

0.9297

0.9687

1.0100

0.7375

115.00

133.98

Support 1

1.3828

1.6126

82.29

0.9245

0.9646

1.0039

0.7327

114.33

133.21

Support 2

1.3789

1.6088

82.08

0.9218

0.9626

1.0009

0.7304

114.00

132.82

Support 3

1.3749

1.6049

81.88

0.9192

0.9605

0.9978

0.7280

113.67

132.44

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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