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FOREX: Dollar Sees a Very Early Bounce on Stalled Risk Recovery, European Schadenfreude

FOREX: Dollar Sees a Very Early Bounce on Stalled Risk Recovery, European Schadenfreude

2011-03-23 05:10:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Sees a Very Early Bounce on Stalled Risk Recovery, European Schadenfreude
  • Euro Fundamental Waves to Pick Up as a Critical Portugal Budget Vote Due
  • British Pound Rallies after Inflation Accelerates, Rate Watchers Count Down to BoE Minutes
  • New Zealand Dollar Traders will Take in GDP Figures as a Guide for Rate Forecasts
  • Canadian Dollar falls Sharply after Disappointing Retail Sales, Looming Budget Impasse
  • Gold Struggles for Direction and Momentum as Risk Trends and Volatility Cool, Inventories Rise

Dollar Sees a Very Early Bounce on Stalled Risk Recovery, European Schadenfreude

Risk appetite interest is still the most prominent fundamental driver for the US dollar. That said, the greenback’s performance mirrored that of the benchmark equity indexes through Tuesday’s trading sessions. So, not only did the dollar post its first advance in four days with the pullback from the S&P 500; but the lack of conviction in this capital market’s reversal led to an equally feeble advance from the benchmark currency. Moving forward, the ebb and flow in investor confidence will continue to carry the greatest influence over the drifting dollar – which should leverage our suspicions of this curbed recovery in stock markets. Yet, our analysis of the dollar doesn’t stop with tracking the already-developed trends in sentiment. We can look further up the way to determine the catalysts for risk itself. Through Tuesday’s session, Europe was in the crosshairs with stories that a government-run Irish bank was considering bilking a coupon payment and speculation that the Portuguese government would collapse at a budget vote - knocking down the next domino in the region’s crisis with a forced bailout for the EU member. In the threat of financial instability in the Euro Zone or stagflation in the UK (more on that below), capital is naturally routed to another highly-liquid region; and with Japan still struggling after the fallout from its earthquake, that leaves the US at the top of a limited list of options.

Aside from the convincing changes in sentiment, it is also worth keeping an eye on the slow changes we are seeing in monetary policy. Though QE2 is still on track; more banks are coming out from under TARP funds and bids are starting to emerge for the government’s MBS holdings.

Related:Discuss the Dollar in the DailyFX Forum, John’s Pick: EURUSD and EURJPY Perfect Compliments on a Volatile Euro

Euro Fundamental Waves to Pick Up as a Critical Portugal Budget Vote Due

There wasn’t much expected from the euro Tuesday as the fundamental docket was clear of both scheduled indicators and definable events. However, the shared currency was nevertheless stirred by headlines through the active trading day. Perhaps the most direct impact on European markets was the circulated rumor that Allied Irish Bank (a lender that is essentially under control of the Irish government) was planning on skipping a 400 million euro coupon payment due on March 23rd. Both the bank and National Treasury Management Agency (NTMA) rebuffed this story as mere speculation; but the jump in Irish government yields to record highs was a very real outcome nonetheless. The influence of what is essentially a rumor reflects the unease surrounding the financial stability of the Euro-Zone markets. This particular scenario was threatening as it suggest Ireland is moving away from the regional policy to not deliver haircuts to bondholders which would undermine the shaky stability between the various EU members. That said, there are far more genuine threats still out there.

In fact, the most immediate hazard for the euro in the forthcoming European session was sounded yesterday with a headline that quoted a JPMorgan economist warning that the Portuguese is at risk of collapsing. This provocative call refers to the Parliamentary discussion over the nation’s growth and stability that will take place today at 3:00 PM GMT. A vote further austerity is at the crux of this meeting; and the opposition’s refusal to pass the effort would be expected to fast track a vote. Given Prime Minister Socrates’ warning that the country cannot survive on lending rates above 7 percent and that a failure to improve its financial position risks a crisis that requires a bailout; the market does not have to reach far to connect the vote to a renewed euro crunch. In reality, it would be very unlikely that a departing government would call for a bailout or that a newly elected officials would do the same early on. However, there would be fewer options down the line to correct the situation; and the probability of an eventual bailout would be that much greater. And, in the meantime, it would create far greater pressure on EU officials who will meet Thursday and Friday to discuss the collective rescue effort.

British Pound Rallies after Inflation Accelerates, Rate Watchers Count Down to BoE Minutes

Top event risk through Tuesday’s trading session fell to sterling traders; and they will once again hold that title for scheduled event risk heading into the forthcoming trading session. While the government deficit grew more than expected and the CBI factory activity report hit a three-year high; the speculative masses were fully focused on the February CPI figures. Over the past two weeks, interest rate expectations have eased off as the consistency of hawkish commentary has abated and a Japanese financial crisis threatened global repercussions. Yet, the scales were tipped sharply to the bulls once again when inflation accelerated beyond the already heady 4.2 percent annualized forecast with a 4.4 percent reading. Arguments that this is temporary from the BoE are growing strained when we consider the core CPI reading hit 3.4 percent and the headline RPI (used in wage negotiations) hit its highest level since 1991. Rate expectations certainly jumped; but the 10 basis point increase in the 12 month rate forecast is comparatively constrained. We await the details from the BoE minutes to count the votes and their forecasts.

New Zealand Dollar Traders will Take in GDP Figures as a Guide for Rate Forecasts

The New Zealand dollar’s primary appeal on the global market is its comparatively high return while its economy derives much of its strength through exports. That said, the swell in the nation’s current account deficit to NZ$3.52 billion hurts the currency on both fronts. Requiring less interpretation, in tomorrow’s early morning session, we have the 4Q GDP figures. This is a pre-February 22nd Christchurch earthquake reading.

Canadian Dollar falls Sharply after Disappointing Retail Sales, Looming Budget Impasse

Through it is a constant threat for the Canadian dollar, oil volatility took a break Tuesday to allow the market to respond to regular fundamental gusts. From the docket, January retail sales reported an unexpected 0.3 percent drop in consumption due largely to car purchases and gas station receipts. In other news, Finance Minister Flaherty rejected all amendments to the proposed budget, raising the possibility of an election.

Gold Struggles for Direction and Momentum as Risk Trends and Volatility Cool, Inventories Rise

The correlation between equities, carry trade and gold hold firm once again Tuesday. However, instead of direction; metals traders were following the lack of volatility across the speculative spectrum. The CBOE’s gold volatility index extended its retracement from last week’s three-month high, leveraging the trading interest behind the market over the natural demand seen in the steady rise in ETF holdings.

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

9:30

GBP

BBA Loans for House Purchase

29350

28932

Overall declining trend may mean continued troubles for UK real estate

10:00

EUR

Euro-Zone Industrial New Orders (YoY)

21.4%

19.3%

Forecasted lower as Ireland, Spain leads drag, countering Germany, France

10:00

EUR

Euro-Zone Industrial New Orders s.a. (MoM)

1.0%

2.7%

11:00

USD

MBA Mortgage Applications

-0.7%

After a 3 month down streak, real estate transactions expected to recover

14:00

USD

New Home Sales

290K

284K

14:00

USD

New Home Sales (MoM)

2.1%

-12.6%

14:30

USD

DOE U.S. Crude Oil Inventories

1745K

Continued Libyan unrest and intervention could result in lower US energy inventories

14:30

USD

DOE U.S. Distillate Inventory

-2601K

14:30

USD

DOE U.S. Gasoline Inventories

-4174K

14:30

USD

DOE U.S. Refinery Utilization

1.4%

15:00

EUR

Euro-Zone Consumer Confidence

-11

-10

Surveyed lower as Irish, Greek problems persist

21:45

NZD

Gross Domestic Product (QoQ)

-0.2%

GDP growth led by increasing commodities demand limited by earthquake damage of industries

21:45

NZD

Gross Domestic Product (YoY)

1.5%

23:00

AUD

Conference Board Leading Index

0.7%

Higher leading index may decrease efforts for PM’s tax cut proposal

23:50

JPY

Merchandise Trade Balance Total (Yen)

¥897.3B

-¥471.4B

Though stronger yen, merchandise transactions expected to be favorable for Japan

23:50

JPY

Adjusted Merchandise Trade Balance (Yen)

¥676.8B

¥191.8B

23:50

JPY

Merchandise Trade Exports (YoY)

9.1

1.4

23:50

JPY

Merchandise Trade Imports (YoY)

4.4

12.4

Currency

GMT

Upcoming Events & Speeches

GBP

9:30

Bank of England Minutes

GBP

12:30

U.K. Chancellor of the Exchequer Osborne Announces Budget

EUR

13:00

Portugal Parliament Discusses Growth, Stability Measures

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

1.6750

89.00

1.0000

1.0275

1.0600

0.8230

127.60

146.05

Resist 1

1.4250

1.6430

86.00

0.9775

1.0000

1.0200

0.8000

120.00

140.00

Spot

1.4203

1.6386

80.92

0.9031

0.9795

1.0112

0.7411

114.93

132.60

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

1.3650

Resist 2

7.7500

5.7800

6.2750

Resist 1

12.5000

1.6300

7.3500

7.8075

1.3250

Resist 1

7.5800

5.6625

6.1150

Spot

11.9851

1.5604

6.9033

7.7940

1.2630

Spot

6.3091

5.2505

5.5661

Support 1

11.7200

1.5300

6.7600

7.7490

1.2500

Support 1

6.2850

5.2185

5.5550

Support 2

11.4400

1.4725

6.5575

7.7450

1.2000

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

1.4280

1.6468

81.46

0.9079

0.9847

1.0184

0.7509

115.81

133.67

Resist 1

1.4242

1.6427

81.19

0.9055

0.9821

1.0148

0.7460

115.37

133.13

Pivot

1.4210

1.6360

81.02

0.9034

0.9784

1.0093

0.7399

115.10

132.46

Support 1

1.4172

1.6319

80.75

0.9010

0.9758

1.0057

0.7350

114.66

131.93

Support 2

1.4140

1.6252

80.58

0.8989

0.9721

1.0002

0.7289

114.39

131.26

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

1.4363

1.6546

81.89

0.9137

0.9885

1.0238

0.7504

116.50

134.40

Resist. 2

1.4323

1.6506

81.65

0.9110

0.9862

1.0206

0.7481

116.11

133.95

Resist. 1

1.4283

1.6466

81.41

0.9084

0.9840

1.0175

0.7458

115.72

133.50

Spot

1.4203

1.6386

80.92

0.9031

0.9795

1.0112

0.7411

114.93

132.60

Support 1

1.4123

1.6306

80.43

0.8978

0.9750

1.0049

0.7364

114.14

131.69

Support 2

1.4083

1.6266

80.19

0.8952

0.9728

1.0018

0.7341

113.75

131.24

Support 3

1.4043

1.6226

79.95

0.8925

0.9705

0.9986

0.7318

113.36

130.79

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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