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  • Dollar Dives to New Lows as Housing and National Activity Slow, Risk Appetite Coasts Higher
  • British Pound at Risk of High Volatility as CPI Data Set to Revive the Interest Rate Debate
  • Euro Rallies for a Third Day after Trichet Clarifies the ECB’s Steadfast Approach on a Hike
  • New Zealand Dollar Holds its Ground after the IMF Forecasts Slow Growth in 2010
  • Canadian Dollar Faces Significant Event but Does that Guarantee Volatility?
  • Gold Gaps Higher Monday but Struggles for Follow Through as Market Volatility Cools

Dollar Dives to New Lows as Housing and National Activity Slow, Risk Appetite Coasts Higher

While the capital markets were otherwise quiet Monday, the dollar was still suffering in a rather dramatic fashion. The rebound in risk appetite trends carried through from last Friday’s rally on the G7’s concerted effort to stabilize FX volatility (specifically for the yen) and the Fed’s announcement that some of the TARP banks have been given a clean bill of health to start paying dividends once again. With the opening move guiding the benchmark S&P 500 Index to a 1.5 percent rally, we would see a healthy boost to commodity currencies that are already bolstered by high rates as well as the euro and pound which are backed by strong interest rate expectations. All told, this is a consistent weight on the shoulders of the consistently troubled greenback.

Moving forward, there are really only two fundamental themes that can encourage the dollar high and keep moving in that direction: a true collapse in risk appetite (the type that shakes financial market capital flows) and a change in monetary policy. Monday’s data offered a notable update on growth; but it wasn’t enough to undermine investor sentiment. The Chicago Fed’s National Activity Index contracted; but it doesn’t alter the longer-term trend of slow and steady growth. At the same time, the 9.6 percent drop in existing home sales was severe but lends itself to the general level of the housing sector. Far more interesting was the Treasury’s announcement that they would start pushing the Mortgage Backed Securities (MBS) that they absorbed during the worst of the financial crisis through Freddie Mac and Fannie Mae back out into the private sector. This toxic debt didn’t disappear; it was just temporarily transferred. This is both a monetary policy move and risk consideration.

Related:Discuss the Dollar in the DailyFX Forum, John’s Pick: USDJPY a Highly Speculative Setup, But so Too is EURUSD and AUDUSD

British Pound at Risk of High Volatility as CPI Data Set to Revive the Interest Rate Debate

Over the coming 24 hours of trading, the British pound is at the highest risk of facing a fundamentally-derived spike in volatility. That said, activity level isn’t the unknown here – it is direction. Looking at sterling’s performance through the opening day of the week, it is worth noting that GBPUSD advanced to within striking distance of breaking out to new 14-month highs while EURGBP maintained a holding position just below a multi-year descending trendline. It isn’t a coincidence that these liquid pairs have moved right up to technically-important levels without making the final decision as to direction. The market is timing its actions to coincide with meaningful event risk. Key for the pound in the upcoming London session is the February CPI data. For 13 months now, annualized reading of headline consumer inflation has topped the Bank of England’s 3.0 percent tolerance band. This has in turn led to intense speculation for a series of rates hikes over the coming year through speculative channels. The only problem is that the MPC itself has refused to cave to price pressures – labeling them transitory.

Something has to give. Either the central bank will rebuff high inflation figures long enough that headline price readings will eventually start to temper; or policy officials will have forced to meet market expectations for the inevitable return of rate hikes. This indicator could play a pivotal role in interest rate speculation and could eventually prove the deciding factor for the timing of the first BoE rate hike. Heading into the release of this inflation report, we see that there a meager 8 percent probability of a 25 bps rate hike from the central bank at its meeting early next month and 63 bps of tightening expected over the coming 12 months (29 bps off the highs to start the month). This peak in rate expectations coincides nicely with policy officials’ decision to disappoint speculators by holding rates once again. Yet, with the consensus forecast for the February CPI figures calling for a 4.2 percent clip; we could very well see hawkish sentiment surge back to life. The risk here is clearly to a hawkish bearing from the event and bullish run for the sterling. However, we need to be cautious. Not only will we have a letter to the Chancellor of the Exchequer that could play down the pressure; the following day we will day we will have the BoE minutes and the government budget.

Euro Rallies for a Third Day after Trichet Clarifies the ECB’s Steadfast Approach on a Hike

If it weren’t for interest rate expectations, would anyone truly be interested in the euro? This is a ‘what if’ that won’t really play out in the market; but it does help us to identify what is truly important for the benchmark currency and thereby what we should be watching for fundamental guidance. Interest rate expectations have played a significant role in driving the euro to the heights it has posted against both currency with low (the dollar) and high yield expectations (the pound). After reaffirmation Monday that ECB President Trichet was not changing his tune from his early March statement, the market is pricing in a near certainty of a hike in April and 122 bps of cumulative rate hikes over the coming 12 months. In the meantime, we are looking ahead to the Portuguese austerity vote and EU summit both scheduled for later this week.

New Zealand Dollar Holds its Ground after the IMF Forecasts Slow Growth in 2010

The outlook for growth in New Zealand was significantly undermined by the earthquake that devastated the nation’s second largest city just a few months ago. The impact is still being priced in after the RBNZ cut the benchmark lending rate to 2.50 percent; and Monday, the IMF forecast 2010 growth could struggle at a 1.0 percent pace of expansion. Yet, this tepid near-term performance seems to already filtering into traders’ collective consciousness. They are starting to look ahead to the eventual return of hikes and the IMF’s 2012 GDP forecast of 4.0 percent.

Canadian Dollar Faces Significant Event but Does that Guarantee Volatility?

In the forthcoming North American session, the Canadian dollar is facing a notable round of event risk that pertains directly to growth expectations – the only side of interest rate expectations that is currently elevated. The Leading Economic Indicators composite gives the broader view; but it is the retail sales that is more timely and ultimately market-moving. That said, they are both spotty for volatility recently.

Gold Gaps Higher Monday but Struggles for Follow Through as Market Volatility Cools

Much like the positive gap from US equities to start the new trading session, gold was similarly notched a remarkable jump on the week’s open. That said, follow through for both was nonexistent. There is a speculative component to the precious metal that attracts free capital; but there is also its safe haven appeal. Neither does particularly well at bolstering gold when volatility is dropping off through – which we are doing now.

For Real Time Forex News, visit: https://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

4:30

All Industry Activity Index (MoM)

2.8%

-0.2%

Higher industry trend points to industry recovery before quake

JPY

5:00

Supermarket Sales (YoY)

-0.1%

Outlook hopeful as sales recover to pre-recession levels

JPY

7:00

Convenience Store Sales (YoY)

5.1%

CHF

7:00

Trade Balance (Swiss franc)

1.96B

Higher exports despite strong currency may ease SNB tensions to intervene in currency markets

CHF

7:00

Exports (MoM)

4.3%

CHF

7:00

Imports (MoM)

0.3%

GBP

9:30

Consumer Price Index (MoM)

0.6%

0.1%

Higher expected numbers my push BoE to raise interest rates to slow down economy in April

GBP

9:30

Consumer Price Index (YoY)

4.2%

4.0%

GBP

9:30

Retail Price Index

230.6

229

GBP

9:30

Core Consumer Price Index (YoY)

3.1%

3.0%

GBP

9:30

Retail Price Index (MoM)

0.7%

0.3%

GBP

9:30

Retail Price Index (YoY)

5.2%

5.1%

GBP

9:30

Retail Price Index Ex Mort Int.Payments (YoY)

5.2%

5.1%

GBP

9:30

Public Finances (PSNCR) (Pounds)

-4.2B

-14.4B

Public finances spending forecasted to fall again as Big Society measures continue to be in force

GBP

9:30

Public Sector Net Borrowing (Pounds)

7.6B

-5.3B

GBP

9:30

PSNB ex Interventions

7.2B

-3.7B

Borrowing expected to recover after lowest level since July 2008

GBP

11:00

CBI Trends Total Orders

-6

-8

Industry trends seen in uptrend as British manufacturing recovers

CAD

12:30

Leading Indicators (MoM)

0.7%

0.3%

Stronger surveyed numbers may suggest recovering Canadian economy

CAD

12:30

Retail Sales (MoM)

1.0%

-0.2%

CAD

12:30

Retail Sales Less Autos (MoM)

0.7%

0.6%

USD

14:00

House Price Index (MoM)

-0.3%

Declining house prices still suggests slower real estate recovery

USD

14:00

Richmond Fed Manufacturing Index

23

25

Lower expected point to still slow eastern industries

NZD

21:45

Current Account Balance

-2.226B

-1.77B

Expected lower as Christchurch quake dampen production

NZD

21:45

Current Account Deficit-GDP Ratio

-2.5%

-3.1%

Currency

GMT

Upcoming Events & Speeches

JPY

1:30

BOJ Board Member Ryuzo Miyao to Speak in Oita City

USD

12:00

Fed's Pianalto Speaks on Economy in Akron

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

1.4445

1.6420

89.00

1.0000

1.0275

1.0600

0.8230

127.60

146.05

Resist 1

1.4250

1.6300

86.00

0.9775

1.0000

1.0200

0.8000

120.00

140.00

Spot

1.4226

1.6314

81.05

0.9052

0.9789

1.0049

0.7342

115.31

132.22

Support 1

1.4000

1.5750

80.00

0.9000

0.9700

0.9600

0.6850

103.80

125.00

Support 2

1.3700

1.5315

75.00

0.8800

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

11.9846

1.5759

6.9535

7.7975

1.2673

Spot

6.2723

5.2418

5.5427

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

1.4303

1.6406

81.65

0.9123

0.9904

1.0155

0.7400

116.06

133.25

Resist 1

1.4264

1.6360

81.35

0.9088

0.9847

1.0102

0.7371

115.68

132.73

Pivot

1.4202

1.6282

81.02

0.9039

0.9798

1.0017

0.7332

115.05

131.83

Support 1

1.4163

1.6236

80.72

0.9004

0.9741

0.9964

0.7303

114.67

131.32

Support 2

1.4101

1.6158

80.39

0.8955

0.9692

0.9879

0.7264

114.04

130.42

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

1.4388

1.6474

82.09

0.9159

0.9879

1.0175

0.7434

116.94

134.06

Resist. 2

1.4347

1.6434

81.83

0.9132

0.9856

1.0143

0.7411

116.53

133.60

Resist. 1

1.4307

1.6394

81.57

0.9105

0.9834

1.0112

0.7388

116.12

133.14

Spot

1.4226

1.6314

81.05

0.9052

0.9789

1.0049

0.7342

115.31

132.22

Support 1

1.4145

1.6234

80.53

0.8999

0.9744

0.9986

0.7296

114.50

131.30

Support 2

1.4105

1.6194

80.27

0.8972

0.9722

0.9955

0.7273

114.09

130.84

Support 3

1.4064

1.6154

80.01

0.8945

0.9699

0.9923

0.7250

113.68

130.38

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