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FOREX: Dollar Rallies as Risk Trends Topple Fed Officials Offer Greater Clarity on Policy Timing

FOREX: Dollar Rallies as Risk Trends Topple Fed Officials Offer Greater Clarity on Policy Timing

2011-03-12 05:05:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Rallies as Risk Trends Topple, Fed Officials Offer Greater Clarity on Policy Timing
  • British Pound Surges after the BoE Inflation Report Stokes the Rate Outlook
  • Euro Losses Not Isolated to the Greenback as Financial Troubles Evolve
  • Australian Dollar Plunges after Sharp Drop in April Employment Figures
  • Canadian Dollar Weighs Influence of Trade Figures against Oil Prices for Direction
  • Swiss Franc Strength Steadily Deteriorating in the Face of Risk Aversion, Euro Troubles
  • Gold Suffers its First Drop in Four Trading Days as the Dollar Regains its Footing

Dollar Rallies as Risk Trends Topple, Fed Officials Offer Greater Clarity on Policy Timing

While its performance wouldn’t break any recent records, the dollar managed to post yet another impressive gain through Wednesday’s trading session. Consistency in the market’s buying effort is essential if the greenback is going to generate a true bull trend that hold beyond the label of a temporary correction. Taking a look at the Dow Jones FXCM Dollar Index, we note that the currency advanced for the seventh time in eight trading days. We haven’t seen a performance this encouraging since the first half of November (during the correction that evolved from the ‘buy the rumor, sell the news’ situation with the second quantitative easing program). The foundation for the move spanned both risk appetite trends and yield expectations – the two most convincing themes for the currency at the moment – and that is encouraging as we look to establish permanence. However, there is reason to remain skeptical, or at the very least cautious. Crossing the analysis lines (everyone should practice with the different brands), we note that the market’s most liquid currency pair – EURUSD – has come up to a relatively popular technical support level at 1.4150. This is just another reason for the market to reevaluate its conviction in this decline. And, fundamentally, there is room for doubt.

Many times before we have spelled out the conditions that would lead the greenback to a genuine recovery – not just a gain against a single counterpart but as a benchmark for the entire FX market, commodities and financial assets. The greatest, lasting influence can be found through risk appetite trends and the dollar’s competitiveness through yield. We were offered an update on both fronts. Playing to the currency’s safe haven appeal, the S&P 500 suffered its first drop in four trading days and its worst single-day decline in eight weeks. Attributing this decline to any of the day’s regularly scheduled event risk would be misleading. The selloff began well before the March trade figures reported record readings from exports and imports with a disappointing increase in the deficit to a $48.2 billion shortfall. The yield outlook is more convincing; but its impact is similarly questionable. Cleveland Fed President Pianalto offered the comment that the group was developing tools to withdrawal stimulus while Atlanta Fed President Lockhart projected growth of 3-4 percent over the next few years. Yet, the real encouragement was from Minneapolis Fed President Kocherlakota who kept up his hawkish momentum. He reiterated his “confidence” that the bank is in a position to raise rates. However, what was truly unique was his view that the ‘extended period’ language used in the Fed’s statements could be potentially interpreted as a waiting period of 2 to 4 meetings ahead and that a rate hike could come before asset sales. Despite these comments, the 12-month rate forecast is barely pricing in a quarter-percent hike. We need more from risk or yield trends to develop a true trend.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video: EURUSD Facing Technical Support, Fundamental Resistance

British Pound Surges after the BoE Inflation Report Stokes the Rate Outlook

As expected, the British pound was in for a significant bout of volatility Wednesday. The market is usually disappointed by the Bank of England monetary policy decisions; because the events rarely provide guidance to speculators when there is no change in the central bank’s efforts. However, with the Quarterly Inflation reports; we are offered updates on expectations on growth and inflation forecasts as well as the policy group’s policy lean. As would be expected after the disappointing recovery in the first quarter GDP figures and the persistent pressure behind the UK government’s austerity bent; the central bank noted the risks to economic growth were skewed to the downside going forward. That said, rate watchers paid more attention to their belief that inflation would hit 5 percent sometime this year and inflation would hold above 2 percent through 2012. This doesn’t move the timeframe for the inevitable hike to the next meeting; but it is certainly seen printing earlier that before.

Euro Losses Not Isolated to the Greenback as Financial Troubles Evolve

Overnight index swaps would price in a 21 basis point increase in 12 month interest rate expectations (bringing the forecast to 93 bps); but this abnormality certainly didn’t play through to price action. The rate hike may find its origins in German Chancellor Merkel’s tentative support of Bank of Italy Governor Draghi for the ECB’s top spot. In the meantime, Merkel would also lead the call to hold back expectations for an automatic increase in Greece’s rescue package. Though this may a voice of fiscal reason; it does the euro and its economy no favors.

Australian Dollar Plunges after Sharp Drop in April Employment Figures

Expectations heading into the Australian employment report were tame; but the ultimate outcome for the April reading was certainly worse than expected. A 22,100 net contraction in jobs was the biggest net decline since June 2009. Furthermore, we note that the contraction was predominately suffered in full-time positions – which collapsed by 49,100 positions – the second biggest drop in two decades.

Canadian Dollar Weighs Influence of Trade Figures against Oil Prices for Direction

The Canadian dollar doesn’t have a particularly high yield (the benchmark is 1.00 percent); so why does the currency tend to perform in step with its Australian and New Zealand counterparts? Interest rate expectations can have just as heavy an influence over price action as standing yield. That said, the 16 bps drop in the 12-month forecast through Wednesday (to 80 bps) marks a serious blow to a questionable performer.

Swiss Franc Strength Steadily Deteriorating in the Face of Risk Aversion, Euro Troubles

It is interesting that the euro was under pressure Wednesday and risk appetite was easing; and yet USDCHF was gaining ground. Until recently, the franc has outshined the greenback as a safe haven currency as it stands as a proximate alternative to the euro and it has notable yield potential according to swaps. Yet, there is also the reality that policy and financial concerns in the Eurozone can and do spill over to Switzerland.

Gold Suffers its First Drop in Four Trading Days as the Dollar Regains its Footing

After suffering its worst tumble in years, gold was attempting a lasting recovery. That three-day effort was put on hold Wednesday as the dollar recovered ground. This speaks more specifically to the dollar’s strength as euro trouble and risk aversion can lead capital to the currency-alternative. However, unless the greenback can generate true yield potential, that fundamental run could stall quickly.

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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

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

Full Time Employment Change

32.1K

Stagnant expectations may show that Australian job market peaking

1:30

AUD

Unemployment Rate

4.9%

4.9%

1:30

AUD

Part Time Employment Change

5.7K

1:30

AUD

Employment Change

17.K

37.8K

1:30

AUD

Participation Rate

65.8%

65.8%

4:30

JPY

Bankruptcies (YoY)

-10

Currently at near record lows

5:30

EUR

French CPI - EU Harmonised (MoM)

0.4%

0.9%

Flat, lower inflation may put more pressure for ECB to keep interest rates steady, pending Germany

5:30

EUR

French CPI - EU Harmonised (YoY)

2.3%

2.2%

5:30

EUR

French Consumer Price Index (MoM)

0.4%

0.8%

5:30

EUR

French Consumer Price Index (YoY)

2.1%

2.0%

5:30

EUR

French CPI Ex Tobacco Index

122.36

121.9

6:00

JPY

Eco Watchers Survey: Current

27.7

Outlook expected negative as slow capital flow problems come out

6:00

JPY

Eco Watchers Survey: Outlook

26.6

6:00

JPY

Machine Tool Orders (YoY)

49.6%

May be hurt by strengthening yen

8:30

GBP

Industrial Production (MoM)

0.8%

-1.2%

Slower manufacturing may confirm struggling British economy, may lead to further pound weakness

8:30

GBP

Industrial Production (YoY)

1.1%

2.4%

8:30

GBP

Manufacturing Production (MoM)

0.3%

0.0%

8:30

GBP

Manufacturing Production (YoY)

2.8%

4.9%

9:00

EUR

Euro-Zone Industrial Production w.d.a. (YoY)

6.3%

7.6%

Peripheral industrial weakness continue to drag on quicker German growth

9:00

EUR

Euro-Zone Industrial Production s.a. (MoM)

0.3%

0.5%

12:30

CAD

New Housing Price Index (MoM)

0.3%

0.4%

Lower expected price index may show peaking real estate market

12:30

CAD

New Housing Price Index (YoY)

2.2%

2.1%

12:30

USD

Initial Jobless Claims

430K

474K

Better labor market conditions may reduce risk aversion, help dollar

12:30

USD

Continuing Claims

3685K

3733K

12:30

USD

Producer Price Index (MoM)

0.6%

0.7%

Weaker preliminary indicator of overall inflation could prompt Fed doves to hold rate longer

12:30

USD

Producer Price Index Ex Food & Energy (MoM)

0.2%

0.3%

12:30

USD

Producer Price Index (YoY)

6.5%

5.8%

12:30

USD

Producer Price Index Ex Food & Energy (YoY)

2.1%

1.9%

12:30

USD

Advance Retail Sales

0.6%

0.4%

Slowly growing retail sales may indicate cautious, but recovering domestic economy

12:30

USD

Retail Sales Less Autos

0.6%

0.8%

12:30

USD

Retail Sales Ex Auto & Gas

0.5%

0.6%

13:45

USD

Bloomberg Consumer Comfort

-45.9

-46.2

Following 3 month upward trend

14:00

USD

Business Inventories

0.4%

0.5%

Slower growth as investment drops

22:45

NZD

Retail Sales Ex Inflation (QoQ)

-0.4%

Higher credit spending may indicate

GMT

Currency

Upcoming Events & Speeches

8:00

EUR

ECB Publishes May Monthly Report

12:30

USD

Fed 's Plosser Speaks on Economic Outlook in Aventura

14:00

USD

Annual Revisions: Business Inventories (retail portion)

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

1.5160

1.6750

89.00

0.9345

1.0275

1.1800

0.8400

127.60

146.05

Resist 1

1.5000

1.6600

86.00

0.8900

1.0000

1.1000

0.8215

125.90

140.00

Spot

1.4207

1.6354

80.91

0.8869

0.9605

1.0694

0.7888

114.94

132.32

Support 1

1.4000

1.6200

80.00

0.8600

0.9500

1.0400

0.7825

115.00

125.00

Support 2

1.3700

1.5750

75.00

0.8500

0.9055

1.0200

0.6850

105.50

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

7.5800

5.6625

6.1150

Resist 1

12.5000

1.6300

7.3500

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

11.6619

1.5864

6.8738

7.7707

1.2366

Spot

6.3278

5.2482

5.5176

Support 1

11.5200

1.5040

6.5575

7.7490

1.2145

Support 1

6.0800

5.1050

5.3040

Support 2

11.4400

1.4725

6.4295

7.7450

1.2000

Support 2

5.8085

4.9115

4.9410

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

1.4518

1.6593

81.66

0.8946

0.9712

1.0973

0.8013

117.80

134.97

Resist 1

1.4363

1.6473

81.29

0.8907

0.9658

1.0834

0.7951

116.37

133.64

Pivot

1.4267

1.6398

80.95

0.8846

0.9586

1.0749

0.7911

115.47

132.74

Support 1

1.4112

1.6278

80.58

0.8807

0.9532

1.0610

0.7849

114.04

131.41

Support 2

1.4016

1.6203

80.24

0.8746

0.9460

1.0525

0.7809

113.14

130.51

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

1.4395

1.6520

81.82

0.8981

0.9702

1.0839

0.7999

116.79

134.37

Resist. 2

1.4348

1.6478

81.59

0.8953

0.9678

1.0803

0.7971

116.32

133.86

Resist. 1

1.4301

1.6437

81.37

0.8925

0.9653

1.0767

0.7943

115.86

133.34

Spot

1.4207

1.6354

80.91

0.8869

0.9605

1.0694

0.7888

114.94

132.32

Support 1

1.4113

1.6271

80.45

0.8813

0.9557

1.0621

0.7833

114.02

131.29

Support 2

1.4066

1.6230

80.23

0.8785

0.9532

1.0585

0.7805

113.56

130.77

Support 3

1.4019

1.6188

80.00

0.8757

0.9508

1.0549

0.7777

113.09

130.26

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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