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FOREX: Dollar Receives its Clearest Policy Boost in Months but We Still Haven’t Confirmed a Reversal

FOREX: Dollar Receives its Clearest Policy Boost in Months but We Still Haven’t Confirmed a Reversal

2011-03-30 05:18:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Receives its Clearest Policy Boost in Months but We Still Haven’t Confirmed a Reversal
  • Euro Troubles Continue to Grow as Portugal and Greece Downgraded, How Long Can it Hold Out?
  • British Pound Already Struggling with Rates Reminded of Austerity’s Dark Side
  • Japanese Yen Diving as the Market Tallies the Fundamental and Economic Damage Post-Quake
  • Australian Dollar Wins Another Record High Close against the Greenback
  • Gold Extends its Decline for a Fourth Day as Capital Markets Climb, Dollar Readies

Dollar Receives its Clearest Policy Boost in Months but We Still Haven’t Confirmed a Reversal

Risk appetite swelled through Tuesday’s session; but surprisingly the dollar’s reaction was not absolute. While the greenback would slide against the commodity / high-yield currencies; it actually managed modest gains against its core counterparts. This is a remarkable performance development. The correlation of the ‘comm bloc’ to underlying sentiment trends is strong; but pairs like EURUSD, GPBUSD and USDJPY offer a better reflection of backdrop fundamentals rather than just a risk-check. Already well into the Asian trading session, we note that the trade-weighted Dollar Index is rising and threatening to reverse a consistent, descending trend channel that dates back to January’s high. If such a shift is to take place, it will almost certainly accompany EURUSD’s slide below 1.40. There is plenty of fundamental pressure on the euro; and it seems to be building with each day. Yet, in this shared currency’s strength, we can see the market’s preoccupation with the potential for return, the disregard risk and the desire to stick with familiar trends. Should the euro’s strength give, it would likely usher a more elemental change.

While keeping track of the more engrained fundamental trends behind the market; we should still take stock of the favorable developments for the dollar this past session. The headline consumer confidence survey was a disappointment; but we should also note the 6.7 percent 12-month inflation expectation from the data. More important though was the Fed’s $2.2 billion reverse repo operation and St. Louis Fed President Bullard’s suggestion that a $100 billion curb to the QE2 program was possible. This is yet another step towards hawkish action and the first hike.

Related:Discuss the Dollar in the DailyFX Forum, John’s Pick: EURJPY Steps into a Bullish Reversal, EURUSD is its Backup

Euro Troubles Continue to Grow as Portugal and Greece Downgraded, How Long Can it Hold Out?

The fundamental deterioration doesn’t seem to let up for the Euro-area; but then again, the currency’s stubborn strength seems to be sourced from an equally deep well. Over the past 24 hours we were met with yet another disturbing round of concerning developments that suggest the EU is diving deeper into a financial crisis that will carry dramatic costs to recover from. Perhaps the least surprising development for the day was the downgrade of Greece and Portugal’s sovereign debt ratings by Standard & Poor’s. It used to be that such events were exceptional and met by tremendous volatility by the FX and capital markets; but the reaction to this round was virtually non-existent. An impatient trader would simply write off the importance of these developments and presume the euro is only susceptible to interest rate expectations at this point; but that is an assumption that would lower our guard to risk that could easily flip the switch on the market. With that in mind, we note that Greece is now three levels below investment grade at BB- and Portugal is three notches below even Ireland. The former may not need to access the market for a while given its EFSF support; but the former is still dependent on investor sentiment – that is unless it asks for a bailout.

Bond yields alone are a strong indication that Portugal will ask for a bailout; but we can gather further support for this scenario through CDS (credit default swaps) and even policy officials. It was reported by Handelsblatt that German Finance Minister Schaeuble remarked to fellow government officials that Portugal would likely seek a bailout before June. So, taking a bigger picture view of such a scenario – would this country’s bailout swamp the current bailout program? No likely. However, a third victim to the region’s economic imbalance and restrictive financial regime will significantly deteriorate confidence in the region’s ability to avoid deeper issues related to social unrest, debt restructuring and the long-term policy changes needed to prevent this from happening again. In the meantime, it is worth noting that Spanish bank Banco Base abandoned its attempt to raise money via the traditional route and instead announced it would ask for state funds to the tune of 1.45 billion euros. Given the liabilities in the Spanish financial markets and Cajas specifically; this important country isn’t the rock of stability that Germany is. And, to keep us focused on upcoming threats, we note that Ireland’s 10-year bond yield is just off a record high before the Stress Test results.

British Pound Already Struggling with Rates Reminded of Austerity’s Dark Side

Perhaps the euro’s stubbornness is rubbing off on the British pound. The sterling was able to gain ground against safe havens like the yen and Swiss franc (though both were lower across the board); but more importantly, it was able to hold its own when measured up to the US dollar. That doesn’t put it in any better standing from the start of the week however. GBPUSD remains on the verge of a meaningful bearish move should it slip below 1.5950; and fundamental confidence is wearing thin. Interest rate expectations – the pound’s primary source of strength – have further deteriorated through Tuesday’s active trading session. Twelve month interest rate expectations dropped further through the day despite the negligible upward revision in the 4Q GDP reading. While economists attribute much of the decline to the weather; the economy is clearly struggling. Furthermore, austerity will further weigh in on growth, curb tax revenues and work against the deficit. Is this the right time?

Japanese Yen Diving as the Market Tallies the Fundamental and Economic Damage Post-Quake

Where most other currencies are in something of a holding pattern recently; the Japanese yen has taken a clear stance in its recent bearish inclination. The currency is now transitioning into its fourth consecutive daily decline against the US dollar; and most other crosses are following along. Japanese officials’ discussion of scrapping a corporate tax cut, raising household levies and increasing the quake tab paints the picture.

Australian Dollar Wins Another Record High Close against the Greenback

While the euro is holding stubbornly in neutral, the Australian dollar is actually making progress. This morning, the commodity currency finds itself advancing to new record (post-float) highs against the greenback. Interest rate expectations don’t hold here like they do for EURUSD as the RBA outlook is surprisingly well-below the Fed’s. Here, we are looking at the correlation to underlying sentiment – seen best in equities.

Gold Extends its Decline for a Fourth Day as Capital Markets Climb, Dollar Readies

Risk appetite trends have advanced and the dollar is struggling for ground; yet despite this, gold still managed to close its fourth consecutive session in the red. Perhaps recent record highs have led the market to rethink the role the precious metal plays in the global financial market. On the other hand, we didn’t print a new lower low, volume is off and ETF holdings are still in an uptrend. Reserve judgment on gold direction.

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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

Leading Index

Higher leading index might push PBoC to increase rates to cool economy

AUD

0:00

DEWR Skilled Vacancies (MoM)

0.0%

Stronger Aussie economy may drive higher demand for skilled labor

AUD

0:30

Job Vacancies

NZD

2:00

Money Supply M3 (YoY)

4.4%

Higher M3 expected as government keeps rates down in recovery

EUR

8:00

Italian Hourly Wages (MoM)

0.1%

Wages remain at recession levels, not very correlated with economic growth

EUR

8:00

Italian Hourly Wages (YoY)

1.7%

GBP

8:30

Index of Services (3Mo3M)

-0.9%

-0.7%

Service index expected to fall despite higher spending, price index

GBP

8:30

Index of Services (MoM)

-1.3%

EUR

9:00

Euro-Zone Business Climate Indicator

1.42

1.45

Lower sentiment forecasted from more economic troubles in Ireland, Mediterranean nations; further woes probably from slower overall Euro-zone recovery from recession

EUR

9:00

Euro-Zone Consumer Confidence

-10.6

-9.9

EUR

9:00

Euro-Zone Economic Confidence

107.5

107.8

EUR

9:00

Euro-Zone Industrial Confidence

6

6.5

EUR

9:00

Euro-Zone Services Confidence

11.3

11.1

CHF

9:30

KOF Swiss Leading Indicator

2.17

2.18

Unchanged as stronger Franc drives down exports, domestic growth

GBP

10:00

CBI Reported Sales

-1

6

Reported sales slow as consumer risk sentiment remains

USD

11:00

MBA Mortgage Applications

2.7%

Shrinking real estate markets may cut into mortgage applications

USD

11:30

Challenger Job Cuts (YoY)

20.0%

Preliminary employment numbers may better forecast actual data

USD

12:15

ADP Employment Change

205K

217K

CAD

12:30

Industrial Product Price (MoM)

0.0%

0.2%

Prices to fall as stronger CAD shows its purchasing advantage

CAD

12:30

Raw Materials Price Index (MoM)

-0.5%

0.3%

CAD

13:00

Teranet/National Bank HPI MoM%

0.3%

Housing prices in complete uptrend since recession low in Apr 2009. Forecasted to grow as Canadian real estate market recovers from demand

CAD

13:00

Teranet/National Bank HP Index

137.51

CAD

13:00

Teranet/National Bank HPI YoY%

4.1%

USD

14:30

DOE U.S. Crude Oil Inventories

1745K

Inventories expected to be unchanged as MENA developments slow, similar energy prices

USD

14:30

DOE U.S. Crude Oil Inventories

-243K

USD

14:30

DOE U.S. Distillate Inventory

-2601K

USD

14:30

DOE Gasoline Inventories

-4174K

USD

14:30

DOE U.S. Refinery Utilization

1.4%

GBP

23:01

GfK Consumer Confidence Survey

-30

-28

Confidence falls as Conservative tax cuts hurt spending and investment

AUD

22:30

RP Data-Rismark House Px MoM S (FEB)

-1.6%

Aussie median city values forecasted to decline further as smaller cities’ real estate still falling

AUD

23:30

RP Data-Rismark House Px MoM NSA (FEB)

-0.9%

Currency

GMT

Upcoming Events & Speeches

USD

17:00

Fed's Bullard Speaks at UBS Dinner in London

USD

18:30

Fed's Hoenig Speaks to London School of Economics

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

1.4097

1.5997

82.45

0.9212

0.9750

1.0291

0.7571

116.23

131.90

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

11.9536

1.5563

6.8543

7.7908

1.2613

Spot

6.3406

5.2904

5.6006

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

1.4200

1.6094

83.08

0.9277

0.9802

1.0352

0.7630

117.17

132.95

Resist 1

1.4148

1.6046

82.76

0.9245

0.9776

1.0322

0.7600

116.70

132.42

Pivot

1.4098

1.5994

82.16

0.9192

0.9760

1.0263

0.7548

115.76

131.37

Support 1

1.4046

1.5946

81.84

0.9160

0.9734

1.0233

0.7518

115.29

130.85

Support 2

1.3996

1.5894

81.24

0.9107

0.9718

1.0174

0.7466

114.35

129.80

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

1.6159

83.48

0.9320

0.9838

1.0423

0.7669

117.88

133.74

Resist. 2

1.4219

1.6119

83.22

0.9293

0.9816

1.0390

0.7644

117.47

133.28

Resist. 1

1.4178

1.6078

82.96

0.9266

0.9794

1.0357

0.7620

117.05

132.82

Spot

1.4097

1.5997

82.45

0.9212

0.9750

1.0291

0.7571

116.23

131.90

Support 1

1.4016

1.5916

81.94

0.9158

0.9706

1.0225

0.7522

115.41

130.97

Support 2

1.3975

1.5875

81.68

0.9131

0.9684

1.0192

0.7498

114.99

130.51

Support 3

1.3934

1.5835

81.42

0.9104

0.9662

1.0159

0.7473

114.58

130.05

v

Written by: John Kicklighter, Senior 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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