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FOREX: Dollar Rally Curbed as Sentiment Recovers from its Dive, Data Comes Up Short

FOREX: Dollar Rally Curbed as Sentiment Recovers from its Dive, Data Comes Up Short

2011-05-25 05:14:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Rally Curbed as Sentiment Recovers from its Dive, Data Comes Up Short
  • Euro Trouble Persists but Traders Back Off Debt Crisis Fears
  • British Pound Holds Firm Despite a Drop in Inflation Expectation and Growing Deficit
  • New Zealand: Where is the Strength against the Kiwi’s Australian Counterpart Coming From?
  • Swiss Franc Refuses to Relinquish its Bullish Position in the Defiance of SNB Warning
  • Gold Hits a Fresh Record High against the Euro, Pound and Australian Dollar

Dollar Rally Curbed as Sentiment Recovers from its Dive, Data Comes Up Short

As we were expecting yesterday, the dollar’s rally stalled through the past session. Considering the greenback’s opening rally wasn’t running under its own momentum, it only makes sense that when the exogenous drivers retreated so would the currency. The Dow Jones FXCM Dollar Index closed its first contraction in three active trading days through Tuesday’s close; though it would still hold above the contentious 9,700 level in the meantime. Looking across the dollar-based majors, a correction is a natural development. With EURUSD facing 1.4000, GBPUSD just above 1.6050 and AUDUSD balancing at the 1.0500 level; the dollar is at the edge of a more significant rally. To graduate to this next bullish phase, a fundamental catalyst is needed; and the docket / newswires were too thin for such a development.

For scheduled event risk, new homes sales figures for April printed a bigger-than-expected 7.3 percent increase; but the general malaise of the sector keeps us from developing too much optimism. Scanning the headlines, typically-dovish St. Louis Fed President Bullard offered an increasingly hawkish read on current conditions. In fact, he suggested that the central bank could cut accommodation in the second half of this year should growth and inflation hold their course. A slight to Europe’s financial conditions would present an indirect dollar boost.

Related:Discuss the Dollar in the DailyFX Forum, John’s Pick: A Setup for All Occasions: EURUSD, GBPUSD and AUDNZD

Euro Trouble Persists but Traders Back Off Debt Crisis Fears

The euro managed to edge out moderate gains against the US dollar and Japanese yen through Tuesday’s session. Is this a sign of recovery for the recently battered currency? No – at least not yet. From a technical perspective, the tepid recovery the euro squeezed out wouldn’t even fully compensate for opening session’s losses. Furthermore, a far more discouraging performance against key counterparts like the British pound and Swiss franc would clue us in to an underlying fundamental disparity. This evolution in price action suggests that we are looking at a natural bounce at the precipice of a bigger bear wave. What determines the next phase of the currency’s future are the fundamental currents. If the financial crisis winds die down, the euro will naturally find some level of buoyancy. This strength is not inherent in the European unit; rather as the primary alternative to the US dollar, there is not enough intrinsic demand for the greenback due to ample stimulus.

Looking for headlines through this past trading day, the focus on sovereign debt crisis seems to have eased. However, this is a matter of focus and fresh content rather than a genuine improvement in conditions. In fact, the same concerns remain – and continue to worsen. While the yield for 10-year Greek bonds eased slightly from record highs; the nation’s credit default swaps notched a new peak of 14.96 percent. According to Blomberg, this is equivalent to a 71 percent probability that the country defaults within the next five years. What makes this situation even more painful is the faction of policy officials that suggest further stimulus is the only viable solution. Adding to the debate, ECB’s Bini commented that a debt restructuring would lead to a collapse in the system. Considering the market is so worried that such an outcome is highly probable and decision makers like German Chancellor Merkel is calling for an extension in the loan repayment period; we come to an impasse – and each side believes the alternative is a doomsday scenario.

Outside of the Greek vortex, the ECB reported that its lending to banks in the region dropped 5.44 billion euros to 432.7 billion euros. In isolation, that would be an encouraging sign as the need for non-standard support is easing; but the total level itself is still extraordinary. As for data, the German IFO business sentiment survey printed a better than expected current assessment while the Euro Zone industrial new orders report for March dropped 1.8 percent. Perhaps the most encouraging report was for the second reading of first quarter GDP. The annual pace of growth held its remarkable 5.2 percent clip; but the real surprise came through the details. Capital investment jumped 5.0 percent, investment rose 6.2 percent and exports advanced 2.3 percent. And, while private consumption printed a slower than projected 1.1 percent growth; the improvement is still far better than the scenario that the periphery is suffering.

British Pound Holds Firm Despite a Drop in Inflation Expectation and Growing Deficit

Interest rate expectations have deflated far enough for the sterling that normal fundamental developments have limited impact on the speculative side of the market. That’s an encouraging situation for the pound which saw public finance numbers report the worst April deficit on records (going back to 1996). Another discouraging outcome: the CBI report for May reflected a sharp drop in inflation expectations, another rate blow.

New Zealand: Where is the Strength against the Kiwi’s Australian Counterpart Coming From?

While risk appetite trends have weighed on the New Zealand dollar; the currency has shown remarkable performance compared to its benchmark Australian counterpart. That is particularly remarkable considering the Aussie dollar reflects a far more stable fundamental situation and higher rates. This deviation may find modest support in yield expectations; but in reality, it is more likely a short-lived anomaly.

Swiss Franc Refuses to Relinquish its Bullish Position in the Defiance of SNB Warning

Just the other day, the SNB voiced its concern that the high level of the Swiss currency would hurt growth – and thereby, rate expectations could feed a deflation scenario that curbs rate expectations. Yet, the currency market seemed to pay little heed to the warning (as surely as they ignored active intervention). Rate expectations for the SNB are anemic; but its role as a euro alternative still stands firm.

Gold Hits a Fresh Record High against the Euro, Pound and Australian Dollar

While gold would post gains against the US dollar; the real action was in its performance against the other benchmark currencies. In euros, pounds and Australian dollars (higher yielding currencies than the greenback); the precious metal hit a fresh record high.

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

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

Conference Board Leading Index (MAR)

0.6%

Both indices have shown steady drop in growth since early 2011

0:30

AUD

Westpac Leading Index (MoM) (MAR)

0.4%

1:30

AUD

Construction Work Done (1Q)

1.4%

0.8%

Recovery may be led by early months

6:00

EUR

German GfK Cons Confidence (JUN)

5.6

5.7

Peripheral risk may dampen consumers

8:00

EUR

Italian Retail Sales s.a. (MoM) (MAR)

0.1%

Italian retail sales may suggest direction of German sales later this week

8:00

EUR

Italian Retail Sales (YoY) (MAR)

0.0%

8:30

GBP

Gross Domestic Product (QoQ) (1Q P)

0.5%

0.5%

Expectations may mirror German GDP with increased investment, lower government spending

8:30

GBP

Gross Domestic Product (YoY) (1Q P)

1.8%

1.8%

8:30

GBP

Gross Fixed Capital Formation(1Q P)

1.0%

-1.8%

Breakdown of estimates show output may be led by exports, also dropoff in government spending as more budget cuts continue

8:30

GBP

Total Business Investment (YoY) (1Q P)

12.2%

8:30

GBP

Private Consumption (1Q P)

0.1%

-0.3%

8:30

GBP

Government Spending (1Q P)

0.2%

0.4%

8:30

GBP

Exports (1Q P)

2.1%

1.7%

8:30

GBP

Imports (1Q P)

-0.7%

3.2%

8:30

GBP

Total Business Investment (QoQ) (1Q P)

0.0%

8:30

GBP

Index of Services (3Mo3M) (MAR)

0.9%

-0.3%

Long term 3 month survey suggests stronger services growth

8:30

GBP

Index of Services (MoM) (MAR)

0.5%

0.6%

8:30

GBP

BBA Loans for House Purchase (APR)

32250

31660

May be early indicator of recovering British housing sector

11:00

USD

MBA Mortgage Applications (MAY 20)

7.8%

May be helped by new home sales

12:30

USD

Durables ex Transportation (APR)

0.5%

2.3%

Estimated orders and production for key manufacturing data may indicate weaker industries going into summer months

12:30

USD

Durable Goods Orders (APR)

-2.5%

4.1%

12:30

USD

Capital Goods Orders Non-Def ex Aircrafts (APR)

-2.0%

4.3%

12:30

USD

Cap Goods Shipments Non-Def ex Aircrafts (APR)

3.0%

13:00

CAD

Teranet/National Bank HPI YoY (MAR)

3.6%

3.8%

Year over year growth slowing as signals might show peaking of Canadian housing prices

13:00

CAD

Teranet National Bank HPI MoM (MAR)

0.2%

0.1%

13:00

CAD

Teranet/National Bank HPI Index (MAR)

138.14

14:00

USD

House Price Index (MoM) (MAR)

-0.5%

-1.6%

House prices expected to fall slower as new home sales surge past expectations

14:00

USD

House Price Purchase Index (QoQ) (1Q)

-1.0%

-0.8%

14:30

USD

DOE U.S. Crude Oil Inventories (MAY 20)

-1500K

-15K

Fall in recent oil prices may increase gasoline demand

14:30

USD

DOE U.S. Distillate Inventory (MAY 20)

0K

-1157K

14:30

USD

DOE U.S. Gasoline Inventories (MAY 20)

450K

119K

16:00

EUR

French Total Jobseekers Change (APR)

-20

-21.1

Slower decline in April jobseekers may show some shoots of French recovery

16:00

EUR

French Total Jobseekers (APR)

2680

23:50

JPY

Corporate Service Price (YoY) (APR)

-1.2%

Service may improve after earthquake

GMT

Currency

Upcoming Events & Speeches

3:30

JPY

BoJ Governor Masaaki Shirakawa to Speak on Japanese Economy

14:40

EUR

ECB's Juergen Stark Speaks on European Economy

17:30

USD

Fed's Narayana Kocherlakota Speaks on U.S. Economy

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

117.60

146.05

Resist 1

1.5000

1.6600

86.00

0.8900

1.0000

1.1000

0.8215

117.24

140.00

Spot

1.4095

1.6179

82.01

0.8801

0.9766

1.0553

0.7972

115.60

132.69

Support 1

1.4000

1.6160

80.00

0.8600

0.9500

1.0400

0.7745

113.80

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

11.6892

1.5981

6.9806

7.7773

1.2475

Spot

6.3419

5.2905

5.5632

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

1.4114

1.6190

82.15

0.8810

0.9774

1.0568

0.7984

115.85

132.93

Resist 1

1.4104

1.6185

82.08

0.8805

0.9770

1.0560

0.7978

115.73

132.81

Pivot

1.4099

1.6179

81.99

0.8799

0.9765

1.0553

0.7970

115.60

132.66

Support 1

1.4089

1.6174

81.92

0.8794

0.9761

1.0545

0.7964

115.48

132.54

Support 2

1.4084

1.6168

81.83

0.8788

0.9756

1.0538

0.7956

115.35

132.39

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

1.4282

1.6343

82.93

0.8910

0.9865

1.0698

0.8083

117.43

134.63

Resist. 2

1.4235

1.6302

82.70

0.8883

0.9840

1.0662

0.8055

116.97

134.15

Resist. 1

1.4188

1.6261

82.47

0.8856

0.9816

1.0626

0.8028

116.52

133.66

Spot

1.4095

1.6179

82.01

0.8801

0.9766

1.0553

0.7972

115.60

132.69

Support 1

1.4002

1.6097

81.55

0.8746

0.9716

1.0480

0.7916

114.68

131.72

Support 2

1.3955

1.6056

81.32

0.8719

0.9692

1.0444

0.7889

114.23

131.24

Support 3

1.3908

1.6015

81.09

0.8692

0.9667

1.0408

0.7861

113.77

130.75

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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