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Dollar Turns to Consolidation Until the Next Wave of Panic Hits

Dollar Turns to Consolidation Until the Next Wave of Panic Hits

2011-09-27 03:44:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Turns to Consolidation Until the Next Wave of Panic Hits
  • Euro Clearly Complacent after Warnings of No EFSF Expansion, Bank Recapitalization
  • Gold Puts in for its Largest Bullish Reversal on Record, Sign of a Trend Change?
  • British Pound: Will BoE Member Adam Posen Set the Stage for Bond Purchases?
  • Swiss Franc: Don’t Forget about the Risk of the EURCHF’s Floor Rising from 1.20 to 1.25
  • Australian Dollar Stabilizing as Rate Outlook Improves, Risk Trend Bounce
  • Japanese Yen: Finance Minister Azumi Warns They are Watching the Yen

Dollar Turns to Consolidation Until the Next Wave of Panic Hits

As the anchor in global financial storms, the dollar depends on severe shifts in underlying sentiment to gain traction on trends. Therefore, it should come as no surprise that the greenback has turned to congestion with the recent bounce in risk trends. Does this mean the dollar’s bullish trend revival has ended immediately after the break to seven-month highs? That is about as likely as the S&P 500 – as a benchmark for broader risk trends – making a permanent floor out of 1,100. In other words, it is very unlikely that the capital markets are returning to a permanent bull trend and the dollar its long-standing bear run. As is the typical pace of a (generally) freely-developing markets, temporary corrections and periods of congestion are normal within larger trends – both on a technical and fundamental basis.

Naturally, with the S&P 500 putting in for its biggest rally in nearly three weeks; speculators were easing back from their panicked state which left the liquidity-haven currency absent a critical fundamental driver. The fog of risk aversion is still obvious given the lack of volume and momentum behind the recent rebound in risky assets; but the greenback runs on a more explicit brand of fear. It is an extreme level of risk aversion that drive the demand for liquidity to a premium; and that means the bar is set far higher for the currency to maintain a bullish trajectory. That said, it is certainly remarkable than the Dow Jones FXCM Dollar Index (ticker = USDollar) has merely stalled and still hovers below the 10,000 mark when the benchmark US stock index put in for a hearty 2.3 percent rally through Monday’s session. Rather than suggest the dollar is now running under its own bullish momentum; this is more of a reflection on the equities market’s performance. Playing to the confines of a near, two-month congestion pattern; the S&P 500 is still sidelined and awaiting a larger trend to determine direction. Hence the disappointing volume.

Should we expect the capital markets and dollar to revive larger trends in the upcoming session? It is unlikely. Larger fundamental themes were present through Monday’s session; and yet, the larger trend eluded us. It is likely that fears of the European financial crisis and its spread to the US and other regions of the global markets are put on hold as the masses wait for something that can unify sentiment – whether it be bullish or bearish. If there were no milestones ahead; sentiment would be able to move under its own power. However, we have the possibility of stimulus from the European region next week with heavy speculation that the ECB will adopt unconventional stimulus policy and the BoE will increase its bond purchasing program next week. In the meantime, we will look to see if smaller developments can ignite volatile pockets of speculative sentiment. In the upcoming session, we have an actual measure of confidence to deal with – the September Conference Board consumer sentiment survey. An outlook for a pickup is silly; and such an outcome would do little to feed a trend. Then again, neither would a drop do much.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:EURUSD and S&P 500 Bounce a Temporary Break in a Larger Bear Trend

Euro Clearly Complacent after Warnings of No EFSF Expansion, Bank Recapitalization

It’s always a clear sign that a fog of complacency or confusion is descending over the market when the previously, dominant fundamental theme can no longer engage the dominant trend. We certainly witnessed a reaction from the euro to weekend headlines (German Finance Minister Schaeuble saying they have no intention to increase the EFSF, German Chancellor Merkel suggesting they should create a barrier to a Greece failure and Nowotny suggesting there were no plans to recapitalize French banks); but there was no follow through.

Gold Puts in for its Largest Bullish Reversal on Record, Sign of a Trend Change?

Gold was without doubt the most remarkable performer in Monday’s session. Following up on 2.4 and 4.8 percent consecutive daily plunges (on Thursday and Friday respectively), the metal put in for an intraday bullish reversal that measured $93.60 from the session low. That creates a wick bigger than the vast majority of all daily ranges for the metal. Technically, that is a strong sign of a bullish reversal. However, though the longer fundamental outlook favors such a rebound; we need to be very cautious of extreme liquidity drives which could hurt the metal.

British Pound: Will BoE Member Adam Posen Set the Stage for Bond Purchases?

The sterling has put in for a remarkable rebound over the previous two active trading sessions. This is a natural rebound that falls into the same vein as the bounce in sentiment. It is more a temporary reprieve than a lasting trend. To remind us of that, we have extreme dove, BoE Member Adam Posen, scheduled to speak in the upcoming session. He’ll almost certainly remind us of the growing likelihood of stimulus next week.

Swiss Franc: Don’t Forget about the Risk of the EURCHF’s Floor Rising from 1.20 to 1.25

We have seen EURCHF ease back with the persistence of the European financial crisis; but we shouldn’t forget about the rumor circulated last week that the SNB could lift its 1.20 floor on the critical pair to 1.25. Having already taken the critical step to putting in a target, moving that benchmark up is an easy step. It further makes sense if the central bank wants to force progress to encourage a speculative appreciation.

Australian Dollar Stabilizing as Rate Outlook Improves, Risk Trends Bounce

As we close in on the RBA’s rate decision next week, we seen that the extreme dovish forecasts that the market has maintained are easing. A week ago, the market was pricing in a 94 percent probability that the central bank would cut by 25bp at the October meeting; but today that certainty is down to 36 percent. This adds leverage to the fact that risk appetite itself is offering the high-yielder relief.

Japanese Yen: Finance Minister Azumi Warns They are Watching the Yen

Japanese Finance Minister Jun Azumi is watching the Japanese yen closely; and its ready to take bold action if needed. This is a threat we have heard one too many times by policy officials in the Land of the Rising Sun; and nothing kills the influence of a catalyst as quickly as familiarity. The economy impact of a record high yen are plainly visible; but officials may need another scare to force their hand to act.

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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

2:00

CNY

Industrial Profits YTD (YoY) (AUG)

28.3%

Drop in profits could show weakness

6:00

CHF

UBS Consumption Indicator (AUG)

1.29

Consumption may increase on peg

8:00

EUR

Euro-Zone M3 s.a. (3M) (AUG)

2.0%

2.1%

EU17 money supply expected stagnant, not expected to prompt ECB action

8:00

EUR

Euro-Zone M3 s.a. (YoY) (AUG)

2.0%

2.0%

8:00

EUR

Italian Hourly Wages (MoM) (AUG)

0.1%

0.0%

Hourly wages expected to moderately grow, possibly due to inflation

8:00

EUR

Italian Hourly Wages (YoY) (AUG)

1.7%

10:00

GBP

CBI Reported Sales (SEP)

-15

-14

British retail expected weaker

13:00

USD

S&P/CS 20 City s.a. (MoM) (JUL)

0.1%

-0.1%

Gauge of US housing seen to moderately recover, though still showing strong headwinds

13:00

USD

S&P/Case-Shiller Composite-20 (YoY) (JUL)

-4.50%

-4.52%

13:00

USD

S&P/Case-Shiller Home Price Index (JUL)

141.3

14:00

USD

Consumer Confidence (SEP)

46

44.5

Major data of the day expected to show moderate pickup despite slowing economy

14:00

USD

Richmond Fed Manufacturing Index (SEP)

-12

-10

Eastern industries still seen weakening

CNY

Leading Index (AUG)

102.25

Index could recover on laxing of tightening

JPY

Small Business Confidence (SEP)

46.4

Business confidence has tapered off

GBP

Nationwide House Prices s.a. (MoM) (SEP)

0.0%

-0.6%

Gauge used by BoE may give support for rate doves, additional stimulus

GBP

Nationwide House Prices n.s.a. (YoY) (SEP)

-0.5%

-0.4%

GMT

Currency

Upcoming Events & Speeches

9:30

CHF

KOF Institute September Economic Forecast

16:30

USD

Fed's Lockhart Speaks on Economy in Jacksonville

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

1.4050

1.5900

86.00

0.9400

1.0675

1.0750

0.9020

112.00

126.50

Resist 1

1.3900

1.5775

81.50

0.9250

1.0300

1.0375

0.8750

106.50

123.00

Spot

1.3485

1.5537

76.50

0.9045

1.0315

0.9778

0.7770

103.16

118.86

Support 1

1.3385

1.5300

76.35

0.8500

0.9950

0.9700

0.7745

102.00

116.00

Support 2

1.3025

1.5180

75.50

0.7800

0.9750

0.9545

0.6850

100.00

114.00

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

16.5000

2.0000

8.5800

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.1025

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.6678

1.8602

8.1036

7.7990

1.2992

Spot

6.8444

5.5177

5.7789

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

1.3697

1.5652

77.03

0.9203

1.0448

0.9999

0.7941

104.83

119.66

Resist 1

1.3591

1.5594

76.76

0.9124

1.0381

0.9889

0.7855

103.99

119.26

Pivot

1.3477

1.5514

76.50

0.9065

1.0320

0.9755

0.7747

102.97

118.52

Support 1

1.3371

1.5456

76.23

0.8986

1.0253

0.9645

0.7661

102.13

118.11

Support 2

1.3257

1.5376

75.97

0.8927

1.0192

0.9511

0.7553

101.11

117.37

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

1.3736

1.5761

77.48

0.9225

1.0480

0.9984

0.7939

105.34

121.08

Resist. 2

1.3673

1.5705

77.23

0.9180

1.0439

0.9933

0.7897

104.80

120.53

Resist. 1

1.3611

1.5649

76.99

0.9135

1.0397

0.9881

0.7855

104.25

119.97

Spot

1.3485

1.5537

76.50

0.9045

1.0315

0.9778

0.7770

103.16

118.86

Support 1

1.3359

1.5425

76.01

0.8955

1.0233

0.9675

0.7685

102.07

117.74

Support 2

1.3297

1.5369

75.77

0.8910

1.0191

0.9623

0.7643

101.52

117.19

Support 3

1.3234

1.5313

75.52

0.8865

1.0150

0.9572

0.7601

100.98

116.63

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

Follow John on twitter at http://www.twitter.com/JohnKicklighter

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

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