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FOREX: Dollar Once again in Danger of a Critical Bearish Breakdown Despite Favorable Risk Flows

FOREX: Dollar Once again in Danger of a Critical Bearish Breakdown Despite Favorable Risk Flows

2011-03-16 05:19:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Once again in Danger of a Critical Bearish Breakdown Despite Favorable Risk Flows
  • Euro Threat Level Raised Once again as Portugal Downgrade and EU Infighting Threatens Fresh Crisis
  • Japanese Yen Jostled between Carry Flows and Capital Market Concerns as BoJ Pumps Liquidity
  • Australian Dollar Slip Could Turn into a Tumble as Rate Expectations Start to Call for Cut
  • British Pound Could Suffer the Most from Tempered Rate Forecasts as Speculation Spurned
  • Gold Suffers its Biggest Loss in Six Weeks as Traders Post Margin

Dollar Once again in Danger of a Critical Bearish Breakdown Despite Favorable Risk Flows

We have one of the most consistent and dramatic tumbles in investor sentiment in months; and the Dollar Index finds itself once again on the verge of breaking a critical three-year support. This seems like a contradiction in terms; but it is not. As we have discussed before, this trade-weighted index is heavily unbalanced to reflect the liquidity of EURUSD. And, this particular pair is projecting its own unique idiosyncrasies as the euro is processing elevated rate expectations and the possibilities of improved market functioning following a surprisingly accommodative EU summit just this past weekend. If we look outside the influence of this one pair, the dollar’s safe haven aspects are better reflected. The dollar has shown notable gains against the British pound, Canadian dollar, Australian dollar and New Zealand dollar. Yet, when EURUSD – and more importantly, the complicated risk bearings of USDJPY and USDCHF – respond with strong dollar rallies, we will know sentiment trends are truly unbalanced. Consequently, we need to keep a close eye on equities, overnight rates, commodities and how they all move together.

In the meantime, there is more to the dollar’s fundamental backdrop than just a push and pull through risk appetite. There is also speculation surrounding interest rate expectations. On that front, the Fed offered some guidance with its rate decision Tuesday. The inclusion of the now-infamous reference to “exceptionally low” rates for an extended period along with a unanimous vote curbs speculation of a hike within six months and early end to QE2. On the other hand, positive reference to growth and limited concern of a global crisis tempers the probability of QE3.

Related:Discuss the Dollar in the DailyFX Forum,

Euro Threat Level Raised Once again as Portugal Downgrade and EU Infighting Threatens Fresh Crisis

With the financial rout in Japan, currency traders have been distracted. Excessive volatility and fear that liquidity will dry up speaks to the market’s more primal side. Yet, in the shock that followed Asia’s dramatic decline, we were faced with obvious and not-so-obvious developments in Europe that warrant our attention. In the ‘obvious’ column was the impact that underlying risk trends would have on the region’s benchmark equity indexes. The German DAX led the region’s knee-jerk reaction with an intraday decline that plunged as low as 5.8 percent. In contrast, the Greek equivalent dropped as much as 4.3 percent, Italy 3.8 percent and Ireland 3.7 percent. These can be chalked up to international investors’ common reaction to a global event. Yet, we have to further consider what the troubles in Japan arouse for the Euro Zone. Interest rate expectations for one were significantly impacted with the 12-month rate outlook now around 100 basis points where it was at 122 bps less than a week before. More direct is the issue that uncertainty borne in any other region of the global financial market will undermine confidence when it comes to the dubious health of European financials.

EU officials have worked hard to bolster market confidence in the region to avoid the impact of another crisis. However, if sentiment is diminished globally, there is little Europe can do to boost capital turnover. Furthermore, a more skeptical crowd will be more weary of those region’s with existing difficulties. So, despite the near colossal effort (for EU officials) to agree to lowering Greek rates, allowing the EFSF to buy government bonds on the primary market and extending support beyond 2013; the market may simply turn too bearish to respond to the effort. Not helping matters at all was Moody’s decision to downgrade Portugal from A1 to A3 while keeping their outlook ‘negative.’ This is unfortunate timing considering the country has a planned bond auction of up to 1 billion euros worth of one-year bills. This establishes a very specific hazard ahead. On the other hand, there is the off-chance that a strong CPI reading could fortify expectations of an April rate hike.

Japanese Yen Jostled between Carry Flows and Capital Market Concerns as BoJ Pumps Liquidity

A third volatile day ended for the Japanese yen Tuesday; but it seems heading into today’s trading session, that rational minds are once again returning to the market place. This does not by any means guarantee stability from here on out; but it is a welcome break from the spectacular shifts between panicked selling and wholesale speculative buying. Though activity has settled, the contradictory flows between carry unwinding keeping the yen bid and foreign capital leaving the Japanese markets is still in place. There was speculation in the New York session that the BoJ had intervened and triggered a short bout of volatility. It is unlikely that we will learn whether this was indeed the case or not for some time (if ever); but the results will be the same regardless – aside from a 60 point swing in the matter of a few minutes, USDJPY was little moved after the market absorbed the move. Besides, the central bank is more preoccupied with the bigger concern of promoting stability in its markets by pumping stimulus into the system. At this point, developments with the Fukushima nuclear crisis and aftershocks are the biggest threats.

Australian Dollar Slip Could Turn into a Tumble as Rate Expectations Start to Call for Cut

The Australian dollar followed the plunge and partial rebound of global equities Tuesday; and the currency will likely track risk trends pretty closely going forward. However, there is a growing fundamental concern surrounding the Aussie dollar that runs deeper than just this reactive nature. Over the past months, we have the market play down China’s efforts to slow its growth and devastating natural disasters. However, thing that may finally let the air out of the Aussie could be rate expectations. Previously nonexistent, there is now speculation of a near-term cut.

British Pound Could Suffer the Most from Tempered Rate Forecasts as Speculation Spurned

Interest rate expectations across the major financial centers tumbled Tuesday; and many yield-dependent currencies suffered for it. However, the pain may be greatest for the sterling going forward consider much of its strength is found not on actual hikes; but expectations of one. The spread of financial fear could further justify a BoE hold. In the meantime, we will watch the jobless claims data for volatility implications.

Gold Suffers its Biggest Loss in Six Weeks as Traders Post Margin

This is not what is traditionally expected from a safe haven (particularly an asset that is also considered an alternative to traditional currencies). Gold marked its biggest selloff in six weeks on the highest level of turnover since the very beginning of the year all while risk trends plunged. The motive: the need for capital. Margin calls on more speculative positions leads investors to take profit on gold positions to access capital.

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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

NZD

21:00

Westpac NZ Consumer Confidence (1Q)

108.3

Confidence likely to have dropped following earthquake in Christchurch.

AUD

23:30

Westpac Leading Index (MoM)

0.8%

Index has been positive since May 2009.

JPY

23:50

BSI Large All Industry (QoQ)

-5.00

Economy had started to slip in first quarter.

JPY

23:50

BSI Large Manufacturing (QoQ)

-8.00

AUD

00:00

Consumer Inflation Expectation

4.3%

Rising commodity prices likely boosted expectations.

EUR

07:00

EU 25 New Car Registrations (FEB)

-1.4%

Registrations could grow for first time since last March.

EUR

09:00

Italian CPI - (NIC incl. tobacco) (YoY) (FEB F)

2.4%

2.4%

Rising inflationary pressures adds to sentiment that ECB will raise interest rates at next meeting.

EUR

09:00

Italian CPI - (NIC incl. tobacco) (MoM) (FEB F)

0.3%

0.3%

EUR

09:00

Italian CPI - EU Harmonized (MoM) (FEB F)

0.2%

0.2%

EUR

09:00

Italian CPI - EU Harmonized (YoY) (FEB F)

2.1%

2.1%

GBP

09:30

Jobless Claims Change (FEB)

1.3K

2.4K

The British labor market continues to rebound at a much slower pace than its Euro-zone and American counterparts.

GBP

09:30

Claimant Count Rate (FEB)

4.5%

4.5%

GBP

09:30

ILO Unemployment Rate (3M) (JAN)

7.9%

7.9%

GBP

09:30

Weekly Earnings ex Bonus 3M/YoY (JAN)

2.2%

2.3%

GBP

09:30

Average Weekly Earnings 3M/YoY

2.1%

1.8%

EUR

10:00

Euro-Zone CPI - Core (YoY) (FEB)

1.1%

1.1%

Prices pressures continue to mount ahead of next ECB meeting.

EUR

10:00

Euro-Zone CPI (MoM) (FEB)

0.4%

-0.7%

EUR

10:00

Euro-Zone CPI (YoY) (FEB)

2.4%

CHF

10:00

ZEW Survey (Expectations) (MAR)

-17.20

Slowed growth likely to weigh on expectations.

EUR

10:00

Euro-Zone Labor Costs (YoY) (4Q)

1.0%

Rising costs a function of inflation, not wages.

USD

11:00

MBA Mortgage Applications (MAR 11)

15.5%

Sustained low rates could extend period of high applications.

CAD

12:30

Manufacturing Shipments (MoM) (JAN)

1.0%

0.40%

Weaker Loonie in January helped exports.

USD

12:30

Housing Starts (FEB)

567K

596K

Housing market continuing to show signs of life, but it remains to be one of the last industries to rebound.

USD

12:30

Housing Starts (MoM%) (FEB)

-5.0%

14.6%

USD

12:30

Building Permits (JAN)

570K

563K

USD

12:30

Building Permits (MoM%) (FEB)

1.2%

-10.4%

USD

12:30

Current Account Balance 4Q

-$110.0B

-$127.2B

Weaker dollar in 4Q helps deficit.

USD

12:30

PPI Ex Food & Energy (MoM) (FEB)

0.2%

0.5%

Any further jumps in prices could necessitate an interest rate hike by the FOMC.

USD

12:30

PPI (YoY) (FEB)

4.7%

3.6%

USD

12:30

Producer Price Index (MoM) (FEB)

0.6%

0.8%

USD

12:30

PPI Ex Food & Energy (YoY) (FEB)

1.8%

1.6%

Currency

GMT

Upcoming Events & Speeches

EUR

10:30

Portugal to Sell up to 1 Billion Euros in Debt

USD

11:30

Fed's Parkinson Addresses American Bankers Association

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

1.4009

1.6090

80.86

0.9171

0.9818

0.9907

0.7310

113.27

130.10

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

11.9804

1.5795

6.9702

7.7971

1.2804

Spot

6.3790

5.3245

5.6422

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

1.4112

1.6291

82.56

0.9299

1.0081

1.0234

0.7468

115.98

133.99

Resist 1

1.4060

1.6191

81.71

0.9235

0.9950

1.0071

0.7389

114.62

132.04

Pivot

1.3958

1.6084

81.16

0.9188

0.9842

0.9943

0.7328

113.30

130.62

Support 1

1.3906

1.5984

80.31

0.9124

0.9711

0.9780

0.7249

111.94

128.67

Support 2

1.3804

1.5877

79.76

0.9077

0.9603

0.9652

0.7188

110.62

127.25

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

1.4177

1.6250

82.05

0.9280

0.9924

1.0048

0.7417

115.00

132.08

Resist. 2

1.4135

1.6210

81.75

0.9253

0.9897

1.0013

0.7390

114.57

131.58

Resist. 1

1.4093

1.6170

81.46

0.9226

0.9871

0.9977

0.7364

114.13

131.09

Spot

1.4009

1.6090

80.86

0.9171

0.9818

0.9907

0.7310

113.27

130.10

Support 1

1.3925

1.6010

80.26

0.9116

0.9765

0.9837

0.7256

112.41

129.11

Support 2

1.3883

1.5970

79.97

0.9089

0.9739

0.9801

0.7230

111.97

128.62

Support 3

1.3841

1.5930

79.67

0.9062

0.9712

0.9766

0.7203

111.54

128.12

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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