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FOREX: Dollar Holds Back from a Meaningful Recovery Step as Capital Markets Quiet

FOREX: Dollar Holds Back from a Meaningful Recovery Step as Capital Markets Quiet

2011-03-29 05:42:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Holds Back from a Meaningful Recovery Step as Capital Markets Quiet
  • Euro Treading a Fine Line Between Risk and Return as the Irish Stress Test Approaches
  • British Pound Flirts with a Reversal as BoE’s Sentance Calls for Gradual Hikes, Posen Further Easing
  • Japanese Yen Finds Little Solace in a Drop in Unemployment and Jump in Sales Pre-Quake
  • Australian Dollar Closes in the Red for the First Time in Six Days as Speculation Runs on Fumes
  • Gold Slides for a Third Day as Volatility Cools, Equities Slip, Dollar Stabilizes

Dollar Holds Back from a Meaningful Recovery Step as Capital Markets Quiet

The US dollar was trading back and forth through the US session without a clear bearing for direction. This was unfortunate for dollar bulls who were hoping the currency could maintain its bullish momentum from last week and perhaps produce a meaningful reversal of what is so far just a temporary correction. There are critical levels across the board; and the dollar needs both volatility and a favorable fundamental wind. Most critical are EURUSD’s test of its rising trend channel that has developed since the beginning of the year (now at 1.40), GBPUSD’s repeated test of the 1.6000 / 5950 range low and USDJPY’s effort to turn its dramatic reversal from record lows to a true bull run above 82. Accomplishing this transition, however, will be difficult on the quietest day of the year to date. Looking at activity levels across the capital markets (beyond just the volatility indexes, which are already exceptionally low); we note that the S&P 500 futures volume was hit its lowest level since beginning of the year, US oil futures similarly measured turnover last seen on December 31st and even EURUSD futures suffered its second lowest level of activity this year. Without a strong fundamental push behind the greenback, it would be very difficult to leverage a meaningful rally.

In the meantime, data from the US was encouraging. Spending rose 0.7 percent (the most since October), pending home sales grew 2.1 percent and the Fed took another small normalization step by conducting a $870 million repo operation. That said, this just simply wasn’t enough.

Related:Discuss the Dollar in the DailyFX Forum, Video: How to Measure Risk and Reward for EURUSD and other Pairs

Euro Treading a Fine Line Between Risk and Return as the Irish Stress Test Approaches

Over the past two weeks, the euro has faced some of the most worrisome scheduled and impromptu event risk that we have seen for any specific currency in some time. And yet, if were to simply look at the performance of the euro, we’d never know it. Some would say that these markets do not make any sense or perhaps that the euro can outperform any concern that comes its way. That would be a hasty evaluation that follows either frustration or perhaps greed. A more grounded assessment finds a perfectly rational explanation. There is a natural ebb and flow for what is important when gauging fundamentals as the masses determine what the most important factor to their own positioning happens to be. It isn’t that the euro ignoring all headwinds with the EU’s inability to pass more ambitious reform, Portugal’s dissolved government and downgrades, the round of Spanish banks that were downgraded and a range of other developments. Instead, the appeal of high rates is keeping speculators preoccupied while the European currency and markets enjoy a period of stability.

With global equities markets wading through their slowest session this year, there wasn’t a significant burden to second guess the shared currency. On the other side of that coin, we saw that the 12 month interest rate forecast for the ECB edged higher to 124bp; while rate watchers priced in a 137 percent chance of a quarter-percent hike (meaning the 25bp move is fully priced in and there is now considerable debate as to a 50bp move) at the policy meeting next week. This preoccupation with return is increasingly critical to keeping the euro elevated. Should rate expectations back off, doubt will quickly fill the void. For Monday, a range of developments further raised the threat level of a meaningful reversal. Already on radar, Portugal found Moody’s warning that it could lower the country’s credit rating again as soon as this week while Standard & Poor’s cut the ratings on five of the nation’s banks. From the most at threat to the best performer of the EU, German political stability was dealt a blow when German Chancellor Merkel’s Christian Democrats lost their control of the wealthy Baden-Wuerttemberg state. Perhaps most timely though was news from Ireland that officials were considering a policy to give senior unsecured bond holders hair cuts on their holdings (share in losses). Given the EU is against this approach, this is likely a bargaining chip for winning cheaper emergency rates.

British Pound Flirts with a Reversal as BoE’s Sentance Calls for Gradual Hikes, Posen Further Easing

Compared to the euro which is finding stability in high rate potential (that is handily offsetting the growing wave of risk that faces the economy), the British pound is losing ground on its rate potential. The 12 month interest rate forecast for the Bank of England now stands at 68bp; which is an increasingly marginal advantage over the Fed outlook and a considerable disadvantage to the euro’s bearings. Where is this doubt bleeding coming from? The Bank of England’s concerted effort to raise inflation expectations (they project it could top out above 5 percent) and the general suggestion that they are willing to tolerate this high water mark is reason enough to kill speculators’ confidence. Adding to this pressure Monday, the MPC’s most hawkish member – Andrew Sentance – further cooled his rhetoric by saying he expects rates to be raised gradually (though moving “sooner”). In contrast, ultra-dove Posen called for more easing and said he’d retire if inflation didn’t cool in a year’s time.

Japanese Yen Finds Little Solace in a Drop in Unemployment and Jump in Sales Pre-Quake

The Japanese yen was confronted with a round of generally encouraging data early Tuesday morning; but the impact of this data was heavily restrained. Amongst the headlines, we saw the jobless rate for February drop from 4.9 percent to 4.6 percent (its lowest level since February 2009), large retail sales for the same month rose 0.5 percent and small business confidence for this month bumped up to 49.5. For an economy that is struggling post quake, this would be very encouraging. The problem is that this data measures pre-quake activity levels.

Australian Dollar Closes in the Red for the First Time in Six Days as Speculation Runs on Fumes

Though it topped a new post-flow, multi-decade high on an intraday basis against the greenback, the Australian dollar ended Monday’s session with its first decline in six days. This pair has deviated from equities (our benchmark for sentiment) which haven’t been able to mark new highs as well as rate expectations which have been moving in the dollar’s favor. We need to be vigilant of the Aussie currency’s strength.

Gold Slides for a Third Day as Volatility Cools, Equities Slip, Dollar Stabilizes

There is a range of very different fundamental drivers that can support gold – a rise in risk appetite, a drop from the dollar, an increase in currency market volatility and inflation expectations. However, when the capital markets and the greenback stabilize while fundamentals continue to undermine margin risk; there is enough to push the precious metal to its third consecutive loss – its longest series since January.

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

JPY

5:00

Small Business Confidence (MAR)

46.6

At pre-recession levels, though off from recent Aug 2010 high

CHF

6:00

UBS Consumption Indicator (FEB)

1.676

At Sep 2008 levels, more to recover

EUR

6:45

French Consumer Spending (MoM) (FEB)

0.5%

-0.5%

Surveyed higher as France exits recession woes

EUR

6:45

French Consumer Spending (YoY) (FEB)

4.0%

2.4%

EUR

8:00

Italian Business Confidence (MAR)

102.6

103

Hampered by lower consumer confidence, lower retail last week

GBP

8:30

Current Account (Pounds) (4Q)

-10.4B

-9.6B

Negative probably due to higher imports, debt repayments outwards

GBP

8:30

Gross Domestic Product (QoQ) (4Q)

-0.6%

-0.6%

Though recovering manufacturing and investment, government spending seen cut by Big Society measures

GBP

8:30

Gross Domestic Product (YoY) (4Q)

1.5%

1.5%

GBP

8:30

Net Consumer Credit (4Q)

-0.1B

-0.3B

Credit seen stagnant as British banks continue to face lending pressures

GBP

8:30

M4 Money Supply (MoM) (FEB)

0.8%

M4 expected to grow, particularly from more relaxed BoE injection policies, though may slow at Apr 7 meeting

GBP

8:30

M4 Ex OFCs 3M Annualized (FEB)

4.9%

GBP

8:30

M4 Money Supply (YoY) (FEB)

-1.7%

GBP

8:30

Net Lending Sec. on Dwellings (FEB)

1.3B

1.8B

Real estate market growth due to lower prices expected may be positive

GBP

8:30

Mortgage Approvals (FEB)

46.5K

45.7K

GBP

8:30

Total Business Investment (YoY) (4Q F)

10.0%

Investment might increase before a last time before BoE rate decision

GBP

8:30

Total Business Investment (QoQ) (4Q F)

-2.5%

USD

13:00

S&P/Case-Shiller Home Price Index (JAN)

142.42

Overall US home prices expected to continue depressed state as major markets continue to face slow demand

USD

13:00

S&P/CS 20 City MoM% SA (JAN)

-0.41%

USD

13:00

S&P/Case-Shiller Composite-20 (YoY) (JAN)

-3.2%

-2.38%

USD

14:00

Consumer Confidence (MAR)

66

70.4

Fall expected from weaker housing, higher initial claims, lower industry

NZD

21:45

Building Permits (MoM) (FEB)

-1.0%

9.6%

Expected fall due to Christchurch Quake

JPY

23:50

Industrial Production (MoM) (FEB P)

-0.1%

1.3%

Although at highest since recession driven by exports, record yen expected to hamper demand and production

JPY

23:50

Industrial Production (YoY) (FEB P)

4.0%

3.5%

EUR

German Consumer Price Index (MoM) (MAR P)

0.4%

0.5%

Important set of numbers for the EU – though bailout concerns, German CPI will greatly affect EU rate decisions during April meeting

EUR

German Consumer Price Index (YoY) (MAR P)

2.1%

2.1%

EUR

German CPI - EU Harmonised (MoM) (MAR P)

0.4%

0.6%

EUR

German CPI - EU Harmonised (YoY) (MAR P)

2.1%

2.2%

Currency

GMT

Upcoming Events & Speeches

USD

10:00

Fed's Bullard Speaks on Monetary Policy in Prague

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

1.4094

1.6003

81.70

0.9170

0.9760

1.0277

0.7535

115.14

130.74

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

11.9595

1.5589

6.8694

7.7979

1.2623

Spot

6.3822

5.2913

5.5913

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

1.4172

1.6094

82.16

0.9269

0.9859

1.0356

0.7592

116.02

131.60

Resist 1

1.4133

1.6048

81.93

0.9219

0.9809

1.0317

0.7563

115.58

131.17

Pivot

1.4077

1.5993

81.62

0.9186

0.9776

1.0275

0.7527

114.87

130.66

Support 1

1.4038

1.5947

81.39

0.9136

0.9726

1.0236

0.7498

114.43

130.23

Support 2

1.3982

1.5892

81.08

0.9103

0.9693

1.0194

0.7462

113.72

129.72

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

1.4260

1.6165

82.67

0.9280

0.9848

1.0407

0.7632

116.75

132.53

Resist. 2

1.4218

1.6125

82.43

0.9252

0.9826

1.0375

0.7608

116.35

132.08

Resist. 1

1.4177

1.6084

82.18

0.9225

0.9804

1.0342

0.7583

115.95

131.63

Spot

1.4094

1.6003

81.70

0.9170

0.9760

1.0277

0.7535

115.14

130.74

Support 1

1.4011

1.5922

81.22

0.9115

0.9716

1.0212

0.7487

114.33

129.84

Support 2

1.3970

1.5881

80.97

0.9088

0.9694

1.0179

0.7462

113.93

129.39

Support 3

1.3928

1.5841

80.73

0.9060

0.9672

1.0147

0.7438

113.53

128.94

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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