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Dollar and S&P 500 Head Into the Fed Gravitational Pull

Dollar and S&P 500 Head Into the Fed Gravitational Pull

2011-09-20 03:59:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar and S&P 500 Head Into the Fed Gravitational Pull
  • Euro Hit First by Lack of Greece Rescue, Then Italian Downgrade
  • British Pound Drops as BoE Quarterly Bulletin Praises Past Bond Purchases
  • Australian Dollar Jumps after Minutes, Will this Rebound Grow Legs?
  • Japanese Yen Skimming Record Highs Against the Dollar
  • New Zealand Dollar Traders Await Trade Data for Growth, Rate Bearings
  • Gold Drops Sharply Despite Renewed European Troubles, Dollar Doubts

Dollar and S&P 500 Head Into the Fed Gravitational Pull

The Fed rate decision is less than 48 hours away; and speculation surrounding the various outcomes for this event will go to work on the dollar and broader capital markets. What kind of influence can a looming event like a FOMC policy announcement have prior to its release? That depends on how much impact we can reasonably expect in its aftermath. And, when we consider the implications that additional stimulus from the world’s largest central bank can have on faltering global sentiment; we can reasonable assume that the masses will be fully preoccupied by this particular event. We can already see this anxiety playing out now. For the Dow Jones FXCM Dollar Index (ticker = USDollar), we find the greenback holding to the congestion it carved out over the past week (at the very top of its five-month range). Alternatively, our favored benchmark for investor sentiment (the S&P 500) has retreated after a week-long rally from the top of a five-week long range. Both of these developments are a sign of a critical lack of conviction – typically ahead of major event risk.

Through the opening 24 hours of the new trading week, the markets were looking to ‘settle’. For risk-based capital markets, that translates into the natural correction after last week’s consistent advance. With the dollar, the lack of conviction was already apparent as the currency floundered. Over the next 36 hours, we will see the conditions further distort for the greenback. That translates into increasingly volatile swings for the currency and risk trends along with an inability to maintain any jump start and maintain any meaningful trends. Naturally, that also suggests the market will overlook most other lesser, fundamental catalysts. That said, the NAHB Housing Market Index released this previous session and new home starts due in the upcoming session will carry little weight. The same holds true for President Obama’s proposal for $1.5 trillion tax increase program to help work down the deficit (the likelihood that this passes Congress is very low).

However, there is one ‘theme’ that can compete with the possibility of further stimulus from the Fed for the dollar’s attention: strong swings in risk appetite trends. There are two reasons that the possibility of further stimulus is influential: it naturally boosts the money supply and it could theoretically boost risk appetite trends. Therefore, sentiment itself is an ultimate consideration. That said, trouble in Europe and the pullback in capital markets is a key reason why pairs like EURUSD and GBPUSD are at or near multi-month lows currently.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:Euro Faces a Revived Greek Crisis, Dollar a Renewed Bank Crisis

Euro Hit First by Lack of Greece Rescue, Then Italian Downgrade

The euro was hit by a wave of disappointing news over the past 24 hours. Negative headlines began over the weekend when it became clear that the EU / IMF meeting over Greece’s first and second rescue programs wouldn’t gain any meaningful traction. With the Monday call coming to a close without any definable progress, investors are starting to worry that the sixth tranche of aid is beyond Greece’s reach (much less the viability of the second bailout program agreed to back in July). Greece is a consistent pain for the euro; but something with a little more shock value for the euro is Standard & Poor’s downgrade of Italy’s sovereign rating (from A+ to A) after the European session close Monday. This will certainly have carry over implications. Remember, if Italian 10-year bond yields surpass 7 percent, it signals to the market a bailout is coming. Then there is the newest issue: news that a major Chinese bank is no longer excepting FX forwards and swaps from European banks.

British Pound Drops as BoE Quarterly Bulletin Praises Past Bond Purchases

Though the Bank of England didn’t come out and say it was considering further stimulus actions in the near future; their reflections on the effectiveness of the existing 200 billion pounds in bond purchases suggests they are justifying a possible future move. According to the central bank’s assumptions, the stimulus program increased GDP by 1.5 to 2.0 percent and added 0.75 to 1.50 percent to inflation. If growth is seen tipping negative in the near future (which seems likely), this could be a signal that they are seriously considering this option.

Australian Dollar Jumps after Minutes, Will this Rebound Grow Legs?

We have discussed the over-blown speculation surrounding Australian rate expectations (the market is pricing in approximately 145 bps worth of cuts over the coming 12 months); but the market doesn’t necessarily run on realistic projections. However, when the people setting rates are saying they are over-extended; it adds a little more legitimacy to the notion. And, that is exactly what the RBA minutes telegraphed this morning.

Japanese Yen Skimming Record Highs Against the Dollar

USDJPY has sunk back to the well-worn 76.35 level through this past session. We are bouncing along what has been a record low for this pair since March. Considering that we had to fight several rounds of stimulus, many iterations of one-off interventions and a consistent G7 threat for coordinated action on the yen to return to this level; we see the power of natural capital flow. So what will Japan / the BoJ do to step up the fight?

New Zealand Dollar Traders Await Trade Data for Growth, Rate Bearings

Interest rate expectations are the New Zealand dollar’s saving grace. Yet, the modest approximate 50 bps worth of hikes seen over the coming year hardly poses a good offset for growing global risk. That puts the kiwi in a precarious position. Bad headlines could finally shake the market to reality. That is why we’ll keep an eye on the upcoming release of the 2Q trade figures.

Gold Drops Sharply Despite Renewed European Troubles, Dollar Doubts

The US dollar is facing serious headwinds as the Fed speculation ramps up while the European crisis is deepening. Between the currencies, it is difficult to establish who is worse off. However, if we are looking at this as a reflection of the overall appeal of currencies; then there is little doubt that their strength is waxing. Then why was gold off through Monday’s session? Just like FX and capital markets, the metal was settling.

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

1:30

AUD

Reserve Bank's Board September Minutes

RBA’s newest minutes may reveal bank’s view of a slowing global recovery

5:00

JPY

Coincident Index (JUL F)

109

Japanese indices seen to taper after a few months of recovery after March’s earthquake

5:00

JPY

Leading Index (JUL F)

106

5:45

CHF

SECO September 2011 Economic Forecasts

May take into account of EURCHF peg

6:00

EUR

German Producer Prices (MoM) (AUG)

0.0%

0.7%

Moderating prices could shift ECB’s focus onto peripheral stability rather than price stability

6:00

EUR

German Producer Prices (YoY) (AUG)

5.8%

5.8%

6:00

CHF

Trade Balance (Swiss franc) (AUG)

2.81B

August figures may be the last decline for exports on SNB peg

6:00

CHF

Exports (MoM) (AUG)

-3.0%

6:00

CHF

Imports (MoM) (AUG)

0.1%

7:00

JPY

Convenience Store Sales (YoY) (AUG)

9.5%

Advanced gauge of Japanese spending

8:00

EUR

Italian Industrial Orders s.a. (MoM) (JUL)

-1.5%

4.1%

July figures unlikely to move European markets as focus returns to Greece

8:00

EUR

Italian Industrial Orders n.s.a. (YoY) (JUL)

8.3%

13.6%

8:00

EUR

Italian Industrial Sales s.a. (MoM) (JUL)

-1.7%

8:00

EUR

Italian Industrial Sales n.s.a. (YoY) (JUL)

10.8%

9:00

EUR

EU17 ZEW Survey (Economic Sentiment) (SEP)

-40

ZEW expectations expected to taper on peripheral troubles

9:00

EUR

German ZEW Survey (Current Situation) (SEP)

45

53.5

9:00

EUR

German ZEW Survey (Economic Sentiment) (SEP)

-45

-37.6

12:30

CAD

Leading Indicators (MoM) (AUG)

0.2%

0.2%

Growth bucking the trend as Canadian economy and domestic demand resilient

12:30

CAD

Wholesale Sales (MoM) (JUL)

0.9%

0.2%

12:30

USD

Housing Starts (AUG) (AUG)

590K

604K

Weaker construction adds concern of slowing economy, may prompt additional fed support

12:30

USD

Housing Starts (MoM) (AUG)

-2.3%

-1.5%

12:30

USD

Building Permits (AUG)

590K

601K

12:30

USD

Building Permits (MoM) (AUG)

-1.8%

-3.2%

22:45

NZD

Current Account Balance (Q2)

-0.671B

-0.097B

New Zealand deficit gap closing slowly as new government targets surplus

22:45

NZD

Current Account Deficit-GDP Ratio (Q2)

-4.0%

-4.3%

22:45

NZD

Net Migration s.a. (AUG)

-220

23:00

GBP

Nationwide Consumer Confidence (AUG)

47

49

Reaching new post-recession low

23:50

JPY

Merchandise Trade Balance Total (Yen) (AUG)

-300.0B

70.0B

Merchandise trade expected to fall sharply due to record yen, slower demand for Japanese goods

23:50

JPY

Adjusted Merchandise Trade Balance (Yen) (AUG)

-22.1B

-30.5B

23:50

JPY

Merchandise Trade Exports (YoY) (AUG)

8.0

-3.4

23:50

JPY

Merchandise Trade Imports (YoY) (AUG)

14.3

9.9

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

1.4500

1.6745

86.00

0.9050

1.0275

1.0750

0.9020

113.50

146.05

Resist 1

1.4000

1.6600

81.50

0.8840

1.0000

1.0800

0.8750

110.00

140.00

Spot

1.3701

1.5718

76.52

0.8809

0.9890

1.0237

0.8279

104.84

120.28

Support 1

1.3500

1.5700

76.35

0.7800

0.9425

1.0200

0.7745

104.00

121.00

Support 2

1.2900

1.5350

75.50

0.7500

0.9055

0.9925

0.6850

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

1.8235

8.5800

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

13.2500

1.8000

8.1025

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.1162

1.8045

7.6632

7.7941

1.2597

Spot

6.6806

5.4364

5.6749

Support 1

12.6000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

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

1.3892

1.5837

77.29

0.8934

1.0017

1.0461

0.8409

106.97

122.33

Resist 1

1.3796

1.5778

76.90

0.8872

0.9953

1.0349

0.8344

105.91

121.30

Pivot

1.3692

1.5705

76.62

0.8812

0.9860

1.0258

0.8258

104.93

120.39

Support 1

1.3596

1.5646

76.23

0.8750

0.9796

1.0146

0.8193

103.87

119.36

Support 2

1.3492

1.5573

75.95

0.8690

0.9703

1.0055

0.8107

102.89

118.45

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

1.4393

1.6392

77.65

0.8030

0.9949

1.0814

0.8613

110.70

126.19

Resist. 2

1.4343

1.6348

77.43

0.7994

0.9922

1.0773

0.8578

110.27

125.77

Resist. 1

1.4293

1.6304

77.22

0.7959

0.9894

1.0732

0.8543

109.83

125.34

Spot

1.4193

1.6215

76.78

0.7888

0.9839

1.0650

0.8473

108.97

124.49

Support 1

1.4093

1.6126

76.34

0.7817

0.9784

1.0568

0.8403

108.11

123.64

Support 2

1.4043

1.6082

76.13

0.7782

0.9756

1.0527

0.8368

107.67

123.22

Support 3

1.3993

1.6038

75.91

0.7746

0.9729

1.0486

0.8333

107.24

122.79

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

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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