• Dollar Seemed to Dive More than the Euro Rallied after EU Summit
  • Euro Offered a Comprehensive Bailout Program with Too Many Holes
  • Canadian Dollar Traders Ready for Retail Sales, CPI Data to Back Rate Volatility
  • British Pound Ignores Confidence, Sales and Financing Data to Watch Euro
  • Australian Dollar Struggling to Keep Pace with Underlying Risk Appetite
  • Gold Pulls Back but Doesn’t Reverse as Investors Question EU’s Efforts

Dollar Seemed to Dive More than the Euro Rallied after EU Summit

There were US dollar headlines hitting the newswires Thursday; but their influence was certainly muted. The greenback’s link to the euro is certainly strong enough that the extraordinary efforts in the EU would have remarkable repercussions for the benchmark currency. Indeed, when momentum behind the euro peaked around the US open; we saw the Dow Jones FXCM Dollar Index (ticker = USDollar) easily clear support and tumble to two-month lows. Perhaps the greenback’s primary appeal in the currency market is its unsurpassed liquidity – a safe haven when financial conditions start to break down. Yet, with that role already suffering from ongoing debt ceiling debates, a sudden drop in demand for safety with a European ‘fix’ (more on whether this is a true solution below) sees all demand for the dollar recede. There will be heavy debate over the effectiveness of the EU plan going forward; but the dollar could still gain traction under the right circumstances. Underlying sentiment trends are still over-extended and thereby prone to triggering flights to safety. And, on another front, we are still awaiting a debt ceiling solution.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: Where will EURUSD, Risk Trends Head after the EU”s Second Bailout?

Euro Offered a Comprehensive Bailout Program with Too Many Holes

The early anticipated European Union summit on the spreading sovereign bond and broader credit crisis yielded a more conclusive program to stabilize the region than most had expected. Yet, if that was the case; why did the euro lose all momentum after the policy efforts were confirmed and fully laid out? It would be a tidy explanation to related it to a ‘buy the rumor and sell the news’ (or more appropriately, stall) scenario; but wouldn’t give us much guidance for where the market’s are heading Friday and into next week.

To truly understand what we are dealing with, we need to look at what was actually put on the table and how the market evolved through the past 24 hours. Heading into the 10:00 GMT meeting, the market knew that German and French heads of state agreed the previous day to series of proposals that they would present at the Summit. Looking at price action from EURUSD over the entire day, we saw that the pair really made its progress before any confirmations were offered. Rumors of topics started to hit the news wires around the US open; and the market was buying into the conjecture. When it came to official confirmations and officials’ speeches, the euro seemed to have spent its bullish fuel.

It isn’t a coincidence that many of the rumored proposals were confirmed – officials will often leak some of the details ahead of time to dampen the shock of the news. In the EU’s list of fixes; the most immediate support was provided trough a 109 billion euro bailout program for Greece from the regional authorities along with an additional 37 billion euros in voluntary participation from the private sector (with another 13.5 billion euros in potential buybacks). Taking it a step further – and attempting to fire break the contagion – officials agreed to extend to reduce Greece’s loans to approximately 3.5 percent and extend their terms from 7.5 percent to a range between 15 and 30 years. More importantly, these favorable terms would be extended to Ireland and Portugal which are the next theoretical domino. Leveraging their firepower, it was decided that the EFSF (and eventually ESM) could preemptively lend to governments who would redistribute capital to their troubled banking systems and even intervene in the secondary market when the ECB determines the markets are experiencing exceptional circumstances.

These efforts (along with a few, smaller additions) are extraordinary; but they aren’t exactly comprehensive. There are too many holes and scenarios where the region’s troubles can swamp these efforts. The most immediate point to make is that the 440 billion euro EFSF was not increased – and indeed, this promised capital isn’t even fully funded. Should Spain or Italy falter, it could easily swamp this program (when it is further drawn down by its use in the secondary market and as a lending vehicle to countries. Another major concern that seems overlooked is that the implications of severe austerity. The proposal statement called for all non-‘program’ EU members to cut their deficit-to-GDP levels to below 3 percent by 2013 and bailout recipients to stick to their targets. This will ultimately lead to deeper recessions for already troubled members. The euro’s immediate trend from here depends on whether the market has grown too skeptical of the EU’s flash-bang efforts. The fact that the euro flat-lined after many of these rumors were confirmed suggests the market is dubious. We’ll have to watch the euro and risk trends.

Canadian Dollar Traders Ready for Retail Sales, CPI Data to Back Rate Volatility

There is a lot of contemplation to do through the final 24 hours of trading; but Canadian dollar traders will have the freedom to work with definable volatility events with the release of the June CPI and May retail sales figures. This is a perfect combination to color interest rate expectations which are currently bolstering a 26 percent probability of a 25 bps hike at the next meeting and 55 bps over 12 months.

British Pound Ignores Confidence, Sales and Financing Data to Watch Euro

There was a significant amount of event risk on the UK docket this previous session (consumer confidence, public borrowing and retail sales); but sterling traders brushed the data aside. The pace for shifts in the UK fundamental outlook is exceptionally slow; so it isn’t much of a leap for traders to monitor the financial ramifications of the European financial crisis. A bed fellow in austerity doesn’t guarantee credit market stability.

Australian Dollar Struggling to Keep Pace with Underlying Risk Appetite

With the global capital markets tuned into the credit health of the largest financial centers in the world; it should come as no surprise that efforts to stem Europe’s troubles led to a remarkable rally from benchmark sentiment barometers like the S&P 500. What is remarkable though is the difference in pace from equity index and the high-yielding Aussie dollar. AUDUSD was temperate and AUDJPY barely gained at all.

Gold Pulls Back but Doesn’t Reverse as Investors Question EU’s Efforts

Why has gold been able to rally to new record highs when it is already so pricey – because the markets are increasingly demanding a viable alternative to fiat money (currencies) that reflect the troubles of their representative economies, financial systems and inflation schemes. The EU’s ‘kitchen sink’ effort certainly eased some pressure; but another point of doubt can be seen in the metal’s refusal to truly reverse.

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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

Import Price Index (QoQ) (2Q)

-1.1%

1.4%

Slower rate of growth could point to strong AUD pressure, less likely to raise rates

1:30

AUD

Export Price Index (QoQ) (2Q)

4.5%

5.2%

5:00

JPY

Supermarket Sales (YoY) (JUN)

-1.4%

Still declining, indicates retail weakness

6:45

EUR

French Own-Company Production Outlook (JUL)

14

French Business confidence surveys flattening near post-recession peak, may show resilience among peripheral problems

6:45

EUR

French Business Confidence Indicator (JUL)

107

109

6:45

EUR

French Production Outlook Indicator (JUL)

13

8:00

EUR

German IFO - Current Assessment (JUL)

122.3

123.3

Business surveys for July expected weaker on continuing Greek fears

8:00

EUR

German IFO - Business Climate (JUL)

113.7

114.5

8:00

EUR

German IFO – Expectations (JUL)

105

106.3

8:00

EUR

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

0.4%

Higher retail sales may not have as much effect on pushing ECB rate decisions

8:00

EUR

Italian Retail Sales (YoY) (MAY)

2.5%

9:00

EUR

Euro-Zone Industrial New Orders s.a. (MoM) (MAY)

0.8%

0.8%

Industrials expected to recover on a year-over-year basis

9:00

EUR

Euro-Zone Industrial New Orders (YoY) (MAY)

10.1%

9.0%

11:00

CAD

Consumer Price Index (JUN)

120.6

Main data point for the day – Core CPI, which the Bank of Canada watches the most, expected slightly higher

11:00

CAD

Bank Canada CPI Core (MoM) (JUN)

0.0%

0.5%

11:00

CAD

Bank Canada CPI Core (YoY) (JUN)

1.9%

1.8%

11:00

CAD

Consumer Price Index (MoM) (JUN)

-0.2%

0.7%

11:00

CAD

Consumer Price Index (YoY) (JUN)

3.6%

3.7%

12:30

CAD

Retail Sales (MoM) (MAY)

-0.3%

0.3%

Consumer retail sales expected increase, coupled with CPI expectations, may press BoC rate hikes

12:30

CAD

Retail Sales Less Autos (MoM) (MAY)

0.3%

0.0%

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

1.6600

86.00

0.8900

1.0275

1.1800

0.9020

118.00

146.05

Resist 1

1.5000

1.6300

81.50

0.8550

1.0000

1.1000

0.8620

113.50

140.00

Spot

1.4379

1.6300

78.43

0.8167

0.9455

1.0836

0.8623

112.77

127.84

Support 1

1.4000

1.5935

78.50

0.8075

0.9450

1.0400

0.7745

109.00

125.00

Support 2

1.3700

1.5750

76.25

0.7900

0.9055

1.0200

0.6850

106.00

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

1.7425

7.4025

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

12.5000

1.6730

7.3500

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

11.6112

1.6673

6.7855

7.7911

1.2102

Spot

6.3147

5.1842

5.4143

Support 1

11.5200

1.5725

6.5575

7.7490

1.2145

Support 1

6.0800

5.1050

5.3040

Support 2

11.4400

1.5040

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

1.4590

1.6451

79.29

0.8266

0.9528

1.0959

0.8706

114.15

128.93

Resist 1

1.4484

1.6376

78.86

0.8217

0.9492

1.0897

0.8664

113.46

128.38

Pivot

1.4312

1.6248

78.60

0.8187

0.9457

1.0796

0.8602

112.46

127.70

Support 1

1.4206

1.6173

78.17

0.8138

0.9421

1.0734

0.8560

111.77

127.16

Support 2

1.4034

1.6045

77.91

0.8108

0.9386

1.0633

0.8498

110.77

126.48

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

1.4571

1.6459

79.26

0.8268

0.9546

1.0975

0.8740

114.49

129.53

Resist. 2

1.4523

1.6419

79.06

0.8243

0.9523

1.0940

0.8711

114.06

129.11

Resist. 1

1.4475

1.6379

78.85

0.8218

0.9500

1.0905

0.8682

113.63

128.69

Spot

1.4379

1.6300

78.43

0.8167

0.9455

1.0836

0.8623

112.77

127.84

Support 1

1.4283

1.6221

78.01

0.8116

0.9410

1.0767

0.8564

111.91

127.00

Support 2

1.4235

1.6181

77.80

0.8091

0.9387

1.0732

0.8535

111.48

126.58

Support 3

1.4187

1.6141

77.60

0.8066

0.9364

1.0697

0.8506

111.05

126.15

v

Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

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