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FOREX: Dollar Can’t Keep Up the Bullish Momentum as the S&P 500 Rises, Euro Retrenches

FOREX: Dollar Can’t Keep Up the Bullish Momentum as the S&P 500 Rises, Euro Retrenches

2011-03-25 04:52:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Can’t Keep Up the Bullish Momentum as the S&P 500 Rises, Euro Retrenches
  • Euro: Why was there a Rally after a Portuguese Downgrade and Will It Hold Through the Summit?
  • British Pound Collapses a Second Day as Moody’s Undermines Austerity Efforts
  • Japanese Yen Little Moved on Inflation, Volatility is Still a Looming Threat
  • Australian Dollar Advance Holds Even against the Euro as Risk Appetite Climbs
  • Gold Tests Another Record High but Momentum is Restrained

Dollar Can’t Keep Up the Bullish Momentum as the S&P 500 Rises, Euro Retrenches

Once again, the US dollar was not the arbiter of its own future. Even without strong outside fundamental influences; the benchmark currency would find itself on the sell side of many traders’ ledgers as the yield outlook keeps the pressure. This unfavorable rate position certainly hurt the greenback’s position again the euro as investors skimmed over round of ominous developments to fall back on an optimistic outlook for the EU meeting and leveraged interest rate expectations. Yet, aside from this particular concern; we were met with another major fundamental theme: risk appetite. While the dollar struggles to take advantage of its safe haven status when market conditions are deteriorating; it quickly reacts to positive shifts in risk positioning. That was the case Thursday as the benchmark S&P 500 revived the momentum in its advance by overtaking 1,300 and fully retraced the critical breakdown that resulted from Japan’s financial troubles.

Over the final 24 hours of trading, there should be only two primary concerns for dollar traders: where are equities heading and how is the market interpreting the EU summit. Capital market performance is our litmus test for investor sentiment and thereby our barometer for the unsafe safe haven dollar. The European meeting can further direct market-wide sentiment and it also represents the cross current on the most liquid currency pair in FX. And, though our focus should be set on these issues; we shouldn’t forget to read through the Fed commentary for reference.

Related:Discuss the Dollar in the DailyFX Forum, Video: Should We Abandon Fundamentals and Trading Attempts for EURUSD?

Euro: Why was there a Rally after a Portuguese Downgrade and Will It Hold Through the Summit?

Yesterday, we discussed how unusual the euro’s performance was through the day. While the currency ended the US trading session in the red, a look at intraday price action reveals that the key fundamental developments through the day had little to do with that remarkable movement. Most of euro’s losses Wednesday occurred before Portugal’s parliament voted down budget cuts many believe were needed to avoid a bailout. The same unusual situation occurred Thursday. If we were to simply read the headlines, a reasonable fundamental trader would have expected the euro to have been perhaps 200 to 300 points lower. The top billing to the day’s European news was Fitch’s downgrade of Portugal from ‘A+’ to ‘A-‘ on the belief that the country’s inability to pass additional budget proposals would raise lending rates and force the economy into more direct straights. Considering exiting Prime Minister Socrates must still represent his country at the EU Summit without the ability to negotiate and a new government legally cannot be formed until 55 days after a special election is called; the country is left in a very risky position with a liabilities coming due next month and additional funding already needed.

Moving beyond Portugal’s devolving situation, we were met with another mass downgrade of 30 Spanish banks by Moody’s. The ratings agency cited concern that rough financial conditions going forward could find Spain unwilling or unable to stabilize smaller lenders as they would need to fortify their own position. Furthermore, Ireland finally posted its 4Q GDP numbers to a disappointed market. A 1.6 percent contraction through the quarter was sharp; and ensures they will require financial assistance for the foreseeable future as they are forced to cut spending to mean EU budget criteria. And, through all of this, the euro rallies. How is this possible? In essence, the euro ignored these otherwise painful developments to focus ahead to the potential of the EU summit. Encouraging results from this official meeting could very well mimic the promises made after the special meeting two Friday’s ago. That being the case, yesterday’s pre-Portugal government collapse could be categorized as excessive. So, the threat of a bigger fundamental wave acts as an anchor on an otherwise volatile market. And, in the meantime, the optimistic lean heading into the final day of the EU meeting can keep the focus on the euro’s best selling point: rate expectations.

British Pound Collapses a Second Day as Moody’s Undermines Austerity Efforts

From a 4.4 percent inflation reading throttling GBPUSD to a 14-month high, we now find the high-flying pair deep into a 300-point reversal. The initial reversal began with the BoE minutes released the day before. Inflation is only as interesting as it bolsters expectations for near-term rate hikes. Yet, in the well-timed transcript from the central bank’s last rate decision; policy officials once again played down the permanence of price growth by raising the bar with a warning that CPI could top 5 percent and that despite this the market still rates still merited a wait-and-see approach. Dialed down rate expectations certainly hurts; but the extent of Thursday’s losses required additional momentum – and it would find that fuel. One of the primary explanations policy officials give for their austerity effort is to protect the nation’s sovereign credit rating. However, Moody’s challenged this belief when it warned they warned the region’s credit rating was at risk if slower growth makes it hard to rein in the deficit. And, adding to this bearish outlook, they lowered their own growth forecast for 2011 from 2.0 percent to 1.6 percent.

Japanese Yen Little Moved on Inflation, Volatility is Still a Looming Threat

How quickly we forget recent events when large fundamental threats distract us. Just a week ago, the Japanese yen was experiencing dramatic volatility and further weigh in on market-wide risk appetite trends. Moving forward, this currency is still at high risk. While we don’t necessarily need to be concerned with data like this morning’s inflation figures; the yen is still at constant threat of carry unwind and G7 intervention.

Australian Dollar Advance Holds Even against the Euro as Risk Appetite Climbs

The euro’s rally seems like it was universal given its progress against the pound, dollar and Swiss franc. However, if we look at EURAUD, we are met with a different picture. The euro’s appeal is in rate expectations (which are uncertain) while the Australian dollar is already equipped with a high yield. So, with the benchmark S&P 500 extending its rebound and the EU summit ahead; the Aussie dollar has the upper hand.

Gold Tests Another Record High but Momentum is Restrained

Gold would put in for yet another record high through Thursday’s close; but on an intraday rather than close basis like the previous session. The advance in equities (as a proxy for risk appetite) and reduction in volatility frees up capital and sets investors on pace for high-potential returns. Now gold bugs are turning to the same catalyst that euro traders are focused on: the EU summit. Volatility won’t be contained to the FX market.

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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

CNY

1:35

MNI Business Condition Survey (MAR)

58.21

Xinhua/MNI survey may fall from PBoC efforts to cool economy

EUR

6:30

French Gross Domestic Product (QoQ) (4Q F)

0.3%

0.3%

Growth expected to flatten out after recovery from 2Q 2009

EUR

6:30

French Gross Domestic Product (YoY) (4Q F)

1.5%

1.5%

EUR

7:00

Germany Import Price Index (MoM) (FEB)

0.9%

1.5%

Expected decline as exports slow, combined with weaker Euro

EUR

7:00

Germany Import Price Index (YoY) (FEB)

11.6%

11.8%

EUR

7:45

French Consumer Confidence Indicator

85

Confidence in larger EU nations expected tempered, affected by others’ instability and overall higher Eurozone risk

EUR

9:00

Italian Retail Sales (YoY)

0.7%

0.4%

EUR

9:00

Euro-Zone M3 s.a. (3M)

1.6%

1.7%

Still off from Dec 2007 highs as capital lending markets remain dry

EUR

9:00

Euro-Zone M3 s.a. (YoY)

1.7%

1.5%

EUR

9:00

German IFO - Business Climate

110.5

111.2

Effects of risk stemming from other Eurozone nations evening out growth in Germany

EUR

9:00

German IFO - Current Assessment

114.6

114.7

EUR

9:00

German IFO - Expectations

106.8

107.9

EUR

9:00

Italian Retail Sales s.a. (MoM)

-0.1%

0.2%

Domestic sales down as instability risks eat into consumer spending

USD

12:30

Gross Domestic Product (Annualized) (4Q T)

3.0%

2.8%

GDP expected to grow as continued government spending replace investment dropoff

USD

12:30

Gross Domestic Product Price Index

0.4%

0.4%

USD

12:30

Core Personal Consumption Expenditure (QoQ)

0.5%

0.5%

Consumption and confidence expected stagnant as harder-hit areas struggle with recovery, spending

USD

12:30

Personal Consumption

4.1%

4.1%

USD

13:55

U. of Michigan Confidence

68

68.2

Currency

GMT

Upcoming Events & Speeches

EUR

EU Summit in Brussels

USD

9:00

Fed's Kocherlakota Speaks at Conference in Marseilles

CHF

10:30

KOF Institute March Economic Forecast

USD

12:30

Fed's Evans Speaks to Reporters at Chicago Fed

USD

13:15

Fed's Lockhart Speaks on Economy in Fort Myers

USD

16:15

Fed's Plosser Speaks on Monetary Policy in New York

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

1.4173

1.6105

80.98

0.9088

0.9764

1.0221

0.7496

114.77

130.41

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

11.9539

1.5511

6.8725

7.7936

1.2607

Spot

6.3265

5.2614

5.5624

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

1.4315

1.6330

81.23

0.9175

0.9867

1.0304

0.7595

115.83

132.26

Resist 1

1.4244

1.6217

81.10

0.9132

0.9815

1.0262

0.7546

115.30

131.33

Pivot

1.4149

1.6155

80.94

0.9080

0.9774

1.0188

0.7472

114.43

130.79

Support 1

1.4078

1.6042

80.81

0.9037

0.9722

1.0146

0.7423

113.90

129.87

Support 2

1.3983

1.5980

80.65

0.8985

0.9681

1.0072

0.7349

113.03

129.33

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

1.4338

1.6267

81.93

0.9196

0.9852

1.0348

0.7591

116.33

132.17

Resist. 2

1.4297

1.6226

81.69

0.9169

0.9830

1.0316

0.7567

115.94

131.73

Resist. 1

1.4256

1.6186

81.45

0.9142

0.9808

1.0285

0.7543

115.55

131.29

Spot

1.4173

1.6105

80.98

0.9088

0.9764

1.0221

0.7496

114.77

130.41

Support 1

1.4090

1.6024

80.51

0.9034

0.9720

1.0157

0.7449

113.99

129.53

Support 2

1.4049

1.5984

80.27

0.9007

0.9698

1.0126

0.7425

113.60

129.09

Support 3

1.4008

1.5943

80.03

0.8980

0.9676

1.0094

0.7401

113.21

128.64

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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