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FOREX: Dollar Rebound Accelerates into a Rally as the S&P 500 Stalls, European Troubles Deepen

FOREX: Dollar Rebound Accelerates into a Rally as the S&P 500 Stalls, European Troubles Deepen

2011-03-24 05:18:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Rebound Accelerates into a Rally as the S&P 500 Stalls, European Troubles Deepen
  • Euro Tumbles before Portugal’s Government Collapses, What will Happen After?
  • British Pound Drops as the BoE Minutes Frustrate Interest Rate Hawks Once Again
  • New Zealand Dollar Shows a Slow but Steady Advance after GDP Release
  • Australian Dollar Doesn’t Take Clear Direction Following Stability Report
  • Gold Closes at a Fresh Record high as Currency Market Instability Boosts Demand

Dollar Rebound Accelerates into a Rally as the S&P 500 Stalls, European Troubles Deepen

The US dollar put in for its biggest rally in two weeks Wednesday; but this performance had little to do with US fundamentals. Once again, the world’s most liquid currency would benefit from shifts in underlying risk appetite trends along with a meaningful deterioration in confidence for its European counterparts. First, putting a floor under the dollar, the S&P 500 put in for a modest gain that kept the benchmark under the closely watched 1,300 figure (a level that acted as important support up until this past week). From there, we saw interest rate expectations behind the pound deteriorate significantly after the release of the BoE minutes; while confidence in the Euro Zone’s financial health (and an implicit preoccupation with an expected ECB rate hike) was shaken by a critical Portuguese budget vote. It was this specific counter-trend fundamental development that lead EURUSD and GBPUSD to sharp declines while AUDUSD and NZDUSD pushed higher and USDJPY held steady.

Cross market flows will likely hold out as the greenback’s primary driver through the immediate future as there is only one thing that can genuinely alter the currency’s standing in the FX spectrum: a recovery in hawkish interest rate expectations. And, since that is slow to develop; we are dependent on speculators to react to risk trends and build up early forecasts of that inevitable first rate hike from the Fed. Speaking of that eventual shift in monetary policy, Fed Chairman Ben Bernanke offered little to compliment the early changes in approach with the government selling mortgage-backed bonds back to the market and allowances for banks to once again tap the capital markets for funding.

Related:Discuss the Dollar in the DailyFX Forum, John’s Pick: AUDUSD Threatens to Turn with Risk EURUSD with the EU Summit

Euro Tumbles before Portugal’s Government Collapses, What will Happen After?

As expected, when euro traders were faced with event risk and a boundary to progress that requires genuine conviction, they shied away from the challenge. Having climbed 1,300 pips against the US dollar since the beginning of the year; the shared currency has covered remarkable ground when the backdrop for financial stability has shown little improvement – and has actually deteriorated substantially in recent weeks. This positive drive was helped along by interest rate expectations and a stubborn hold on underlying risk appetite trends; but nevertheless speaks to an unbalanced picture of risk/reward. That said, with the pair testing the highs from this past November and facing the uncertainty in the EU’s two-day Summit; it was a reasonable shift to a temporary state of caution. But, what about an early correction? That is what we were met with in Wednesday’s session – and notably, this reversal actually began before the day’s true wave hit the wires: the failed Portuguese budget vote.

Compared to the gathering of EU officials over the final 48 hours of this trading week, the parliamentary vote for Portugal’s growth and stability is less extensive in scope. On the other hand, it is more timely, offers a clear step towards deterioration and feeds the risk of a crisis far more so than does the possibility that policy officials will be able to agree on small measures to expand their bailout effort. At its foundation, the worst fundamental outcome for the summit is that the policy effort will remain status quo. In contrast, Portugal’s unwillingness to pass necessary budget cuts has led to Prime Minister Socrates offering his resignation and could further lead to a general dissolution of the government, an inability to cover coming financial obligations and it could eventually necessitate a bailout. Yet, despite the dim future this development presents, the euro didn’t significantly accelerate in its declines after the development. This can partly be attributed to a market that is concerned about what Thursday and Friday hold and partly due to the European markets being closed when the news hit the wires. As such, we await the upcoming European session. While the EU offer something early enough to staunch bleeding caused by Portugal’s descent?

British Pound Drops as the BoE Minutes Frustrate Interest Rate Hawks Once Again

Expectations were high for volatility from the British pound Wednesday with the combined influence of the Chancellor Osborne’s budget and the BoE minutes. The lesser of these two events was the government’s report on finances. The programs that are in place have been known for some time; but expected savings from spending cuts helped fill in expectations a little. Perhaps the most remarkable news from this particular report was the downgrade in 2011 growth expectations from 2.1 percent to 1.7 percent and the increase in annual borrowing to 122 billion pounds. But, the negative impact of austerity on growth is already well-engrained in traders’ forecasts. What is more fluid at this point is interest rate expectations. And, after the 4.4 percent CPI reading; expectations for a near-term hike had advanced sharply. That said, the wrap up of the MPC’s last policy meeting actually delivered a blow to rate hawks. While the vote showed three members (Sentance, Weale and Dale) once again voted for a hike; the official commentary felt like a policy anchor. Despite projections of an inflation potentially exceeding 5 percent later this year; the neutral majority stated that there was “merit in waiting” to see how price conditions develop. Something has to give.

New Zealand Dollar Shows a Slow but Steady Advance after GDP Release

Risk appetite trends still apply to the New Zealand dollar. As an ‘investment’ currency, the kiwi generally climbs as investor sentiment rises and struggles when it isn’t. Yet, there is also still a deficit that the currency can fill after its dramatic tumble following the RBNZ rate cut. That said, we need to see support for a positive rate shift. The 0.2 percent rise in 4Q GDP was better than expected, but is it a buffer to the 1Q earthquake?

Australian Dollar Doesn’t Take Clear Direction Following Stability Report

The correlation between the Australian dollar and equities is especially strong this week – which is remarkable given the lack of volatility we have seen recently. There was a chance that the RBA’s Financial Stability Review could generate its own activity; but the reflection on the economy and banking system offer little surprise. So, we are left to our assessment of risk. The next big S&P 500 move will likely find AUDUSD following.

Gold Closes at a Fresh Record high as Currency Market Instability Boosts Demand

Historically, a strong and positive correlation between gold and equities is unusual. Currently, the relationship is fortified by the level of investment in the precious metal and the greater presence of the speculative crowd. That said, Wednesday would bring a fresh record high close from gold while equities struggled for progress. This divergence traces back to the deterioration in currency market stability.

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

EUR

7:45

French Business Confidence Indicator

105

106

The French are the first to report important data today in the Eurozone. Growth expected to be subdued as growth is countered by unemployment

EUR

7:45

French Own-Company Production Outlook

16

EUR

7:45

French Production Outlook Indicator

19

EUR

8:00

French PMI Manufacturing

56.0

55.7

EUR

8:00

French PMI Services

59.5

59.7

EUR

8:30

German PMI Manufacturing

62

62.7

German purchasing expected to be stable due to lower overall demand

EUR

8:30

German PMI Services

58.4

58.6

EUR

9:00

Euro-Zone PMI Composite

57.8

58.2

Zone wide PMIs all forecasted lower as Italian, Greek, Spanish numbers pull down already weak data even further

EUR

9:00

Euro-Zone PMI Manufacturing

58.3

59

EUR

9:00

Euro-Zone PMI Services

56.3

56.8

EUR

9:00

Italian Consumer Confidence Index s.a.

106.0

106.4

Consumer confidence lower as growing food prices combine with Italian economic insecurity

GBP

9:30

Retail Sales ex Auto Fuel (MoM)

-0.6%

1.6%

Even with higher CPI data, overall retail sales seen as decreasing as consumers still refrain from spending

GBP

9:30

Retail Sales w/Auto Fuel (MoM)

-0.6%

1.9%

GBP

9:30

Retail Sales ex Auto Fuel (YoY)

2.5%

5.3%

GBP

9:30

Retail Sales w/Auto Fuel (YoY)

2.4%

5.3%

USD

12:30

Durables Ex Transportation

2.0%

-3.0%

Durable deliveries expected to pick up as stimulus shows results

USD

12:30

Durable Goods Orders (FEB)

1.2%

3.2%

USD

12:30

Cap Goods Orders Nondef Ex Air

4.3%

-6.2%

Capital goods orders expected to recover from lowest point set Jan 2009

USD

12:30

Cap Goods Ship Nondef Ex Air

-1.9%

USD

12:30

Initial Jobless Claims

383K

385K

Claims persist, though in downtrend since peak in March 2009

USD

12:30

Continuing Claims

3700K

3706K

USD

13:45

Bloomberg Consumer Comfort

-48.5

-48.5

USD

14:30

EIA Natural Gas Storage Change

-71

Storage expected to decrease as higher crude prices shift demand towards natural gas

EUR

17:00

French Total Jobseekers Change

-19.3

Total jobseekers change expected to be flat as French economy woes persist

EUR

17:00

French Total Jobseekers

2703.2

USD

20:00

RPX Composite 28 Day (YoY)

-3.6%

Lowest levels since 2003 shows real estate prices still have long to recover

USD

20:00

RPX Composite 28 Day Index

186.61

JPY

23:30

Tokyo CPI (YoY)

-0.1%

-0.1%

Actual data predicted to fall further below than preliminary data as radiation fears, especially in food, decrease demand in all goods

JPY

23:30

Tokyo CPI Ex-Fresh Food (YoY)

-0.3%

-0.4%

JPY

23:30

Tokyo CPI Ex Food Energy (YoY)

-0.3%

-0.3%

JPY

23:30

National CPI (YoY)

0.0%

0.0%

JPY

23:30

National CPI Ex-Fresh Food (YoY)

-0.30%

-0.2%

JPY

23:30

National CPI Ex Food Energy (YoY)

-0.6%

-0.6%

JPY

23:50

Corporate Service Price (YoY)

-1.2%

-1.1%

Surveyed to remain at current levels as economy still struggles after recession low

Currency

GMT

Upcoming Events & Speeches

EUR

EU Summit in Brussels

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

1.4128

1.6253

80.89

0.9082

0.9801

1.0153

0.7428

114.28

131.47

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

11.9836

1.5557

6.9198

7.7942

1.2642

Spot

6.3346

5.2784

5.5931

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

1.4263

1.6450

81.26

0.9159

0.9864

1.0217

0.7471

115.45

133.31

Resist 1

1.4195

1.6352

81.07

0.9120

0.9833

1.0185

0.7449

114.87

132.39

Pivot

1.4148

1.6285

80.89

0.9050

0.9812

1.0125

0.7413

114.45

131.79

Support 1

1.4080

1.6187

80.70

0.9011

0.9781

1.0093

0.7391

113.87

130.87

Support 2

1.4033

1.6120

80.52

0.8941

0.9760

1.0033

0.7355

113.45

130.27

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

1.4292

1.6415

81.84

0.9191

0.9891

1.0278

0.7521

115.83

133.23

Resist. 2

1.4251

1.6374

81.60

0.9164

0.9869

1.0247

0.7498

115.44

132.79

Resist. 1

1.4210

1.6334

81.37

0.9136

0.9846

1.0216

0.7475

115.05

132.35

Spot

1.4128

1.6253

80.89

0.9082

0.9801

1.0153

0.7428

114.28

131.47

Support 1

1.4046

1.6172

80.41

0.9028

0.9756

1.0090

0.7381

113.51

130.59

Support 2

1.4005

1.6132

80.18

0.9000

0.9733

1.0059

0.7358

113.12

130.15

Support 3

1.3964

1.6091

79.94

0.8973

0.9711

1.0028

0.7335

112.73

129.71

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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