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Dollar Exceptionally Volatile but Fails to Jump Start Rally

Dollar Exceptionally Volatile but Fails to Jump Start Rally

2011-10-19 03:46:00
John Kicklighter, Chief Currency Strategist
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  • Dollar Exceptionally Volatile but Fails to Jump Start Rally
  • Euro Driven by Rumor of Grand 2 Trillion Bailout, Ignores Spanish Downgrade
  • British Pound: Why High CPI Hurts and What will the BoE Minutes Offer?
  • Australian Dollar Recovers Alongside Equities, No Clear Trend Just Yet
  • Japanese Yen Unfazed by Yet Another Rumor of Official’s Plans for the Yen
  • New Zealand Dollar Lags the Aussie Rally Despite Bollard’s Hawkish View
  • Gold Finally Sees a Breakout but Quickly Retraces the Losses

Dollar Exceptionally Volatile but Fails to Jump Start Rally

Like the rest of the risk-sensitive assets in the market, the US dollar was exposed to tremendous volatility through Tuesday’s session; but the high-level safe haven wouldn’t translate activity into clear direction. Once again, to understand this price action (to establish what is important and where we will head going forward); we trace impact back to the quality of the catalyst. In a trading day that was heavily influenced by headlines and unexpected fundamental drivers; we note that there was ultimately no progress offered on underlying investor sentiment as the there was no material change to the balance of risk and reward through the immediate future. The dramatic rebound in equities as well as high-yield currencies and subsequent drop in sanctuaries like the greenback has come through relief. The threat of a building financial crisis has eased without tangible evidence of its spread (beyond what is already priced in). Yet, if we are to extend the climb in capital markets; we need more than breathing room. We need a fundamental reason to believe growth, revenue and yields will expand going forward.

Scanning the charts for reaction to headlines through the past session, there was little doubt that the Guardian article that suggested Germany and France had agreed to support a massive bailout program (more on that below) carried the greatest influence over price action. Yet, even before the news was refuted, the risk rally died out quickly. Notably, this curbed enthusiasm stopped the S&P 500 before it confirmed a serious break above the 1,230/27 range resistance from the past two months, EURUSD well before it threatened to overtake 1.4000 again and AUDUSD with a wide berth to the 1.0400 resistance. In other words, while this was a catalyst that unified fundamentally different pairs; it was never a driver that was destined to establish a new underlying trend (especially one that flies in the face of so much skepticism). The same general cynicism holds for the big ticket 3Q earnings that hit the tapes. Where Bank of America (one of the most troubled US banks) reported earnings per share well beyond the consensus forecast; market participants are now well aware of the creative accounting that takes place to overtake these headline numbers. Then there was Goldman Sachs and Apple that offered outright misses.

What can we learn from the market’s past 24 hour performance to guide our expectations going forward? First, we can establish that the dollar and risk-based assets are prone to volatility and can therefore take to false breakouts. On the other hand, underlying trends that are rooted in risk sentiment require tangible drivers to set up. These aren’t favorable conditions for those that play exact technical levels or are ready to dive into long-lasting runs. Greenback traders need to keep a watchful eye on European headlines, policy officials’ commentary and the S&P 500.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: S&P 500 Proves More Sensitive than EURUSD to Volatile Bailout Rumors

Euro Driven by Rumor of Grand 2 Trillion Bailout, Ignores Spanish Downgrade

Though the top catalyst for the previous trading day was the rumor of a 2 trillion euro EU bailout agreement between Germany and France; it wasn’t the euro that posted the biggest reaction to the news. Instead, the high-yield investment currencies (the Aussie, Kiwi and Canadian dollars) and equities would far more significant progress. What does that tell us: that the market is far more realistic with the options and scenarios for stabilizing the European region. Even if the report were legitimate – it was refuted – there is still the reality that the previous two efforts to produce meaningful rescue programs are still lacking funding and effectiveness. In contrast, Moody’s downgrade of Spain, its warning that France was under review and the inability to agree on private holders’ write downs on Greek debt are all tangible risks.

British Pound: Why High CPI Hurts and What will the BoE Minutes Offer?

We have grown used to the fundamental relationship between inflation and currency performance being strongly positive. However, that link has changed for the British pound. Given the Bank of England’s clear interest in pursuing stimulus to counteract the government’s austerity; the probability of rate hikes are exceptionally low. In the meantime, 5.2 percent CPI (the highest in 11 years) is cutting into consumer purchasing power. The net result: stagflation. This will heighten interest in the BoE minutes. Will they focus on stimulus or entertain stimulus and rate hikes?

Australian Dollar Recovers Alongside Equities, No Clear Trend Just Yet

With a strong advance in risk appetite trends; the FX market’s highest yielding liquid currency would certainly take higher. We can see the influence that risk appetite trend have over this market when not long ago we were lamenting the Aussie dollar struggling disproportionately for its pained interest rate outlook. When the underlying rate and risk outlook improves, it can cover a lot of inequity for speculative assets.

Japanese Yen Unfazed by Yet Another Rumor of Official’s Plans for the Yen

Another day, another vow from Japanese policy officials to do something about the strength of the yen. According to news agency Nikkei, the BoJ and Japanese government would create a group to monitor the impact of programs meant to weigh the currency lower. Unfortunately, this doesn’t raise the threat level of reversal on the yen as we still don’t have a clear plan to contemplate for turning the tides.

New Zealand Dollar Lags the Aussie Rally Despite Bollard’s Hawkish View

When it comes to market sentiment, it is really about risk versus reward. Despite remarks from RBNZ Governor Alan Bollard suggesting the rebuilding effort is Christchurch would stoke growth and inflation (and thereby preclude stimulus), an Aussie dollar veiled by a dovish rate outlook would outperform its kiwi counterpart. Higher yield is ultimately what the market looks for when volatility and conviction kick in.

Gold Finally Sees a Breakout but Quickly Retraces the Losses

After weeks of progressively constrictive congestion for gold, the safe haven commodity finally found a break Tuesday that followed its risk lines (bearish). However, the drive was quickly retraced. Not only was this in reaction to the performance of the Euro, S&P 500 and other risk-sensitive assets; but it was also a reflection of the higher requirements needed for moving this genuine safe haven into a serious trend.

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

DEWR Internet Skilled Vacancies MoM (SEP)

-0.6%

May point to weaker job market

2:00

CNY

Conference Board Leading Economic Index (AUG)

158.6

Index could slow on fall in demand

4:30

JPY

All Industry Activity Index (MoM) (AUG)

-0.4%

0.4%

Activity index expected to weaken

8:00

EUR

Euro-Zone Current Account n.s.a. (euros) (AUG)

-3.2B

Current account may fall further as recovery weakens

8:00

EUR

Euro-Zone Current Account s.a. (euros) (AUG)

-12.9B

8:00

EUR

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

7.7%

Italian sales and industrial orders could fall, although focus remains on debt repayment

8:00

EUR

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

1.7%

1.8%

8:00

EUR

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

4.2%

6.5%

8:00

EUR

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

1.6%

9:00

EUR

Euro-Zone Construction Output s.a. (MoM) (AUG)

1.4%

Construction has showed continued

9:00

EUR

Euro-Zone Construction Output w.d.a. (YoY) (AUG)

1.2%

11:00

USD

MBA Mortgage Applications (OCT 14)

1.3%

Applications could lead housing health

12:30

CAD

Leading Indicators (MoM) (SEP)

0.1%

0.0%

September data could improve

12:30

USD

Housing Starts (SEP)

594K

571K

US construction and housing still points weaker, expected to drag on overall recovery

12:30

USD

Building Permits (MoM) (SEP)

-2.4%

3.2%

12:30

USD

Housing Starts (MoM) (SEP)

3.9%

-5.0%

12:30

USD

Building Permits (SEP)

610K

625K

12:30

USD

CPI (MoM) (SEP)

0.3%

0.4%

US headline and core inflation expected to remain stagnant, though the Federal Reserve remains weary on providing additional stimulus

12:30

USD

CPI Ex Food & Energy (MoM) (SEP)

0.2%

0.2%

12:30

USD

CPI (YoY) (SEP)

3.8%

3.8%

12:30

USD

CPI Ex Food & Energy (YoY) (SEP)

2.1%

2.0%

12:30

USD

CPI Core Index s.a. (SEP)

226.014

12:30

USD

CPI n.s.a. (SEP) (SEP)

226.545

14:30

USD

DOE U.S. Gasoline Inventories (OCT 14)

-4134K

A mild recovery in inventories points to higher demand

14:30

USD

DOE U.S. Crude Oil Inventories (OCT 14)

1344K

14:30

USD

DOE Cushing OK Crude Inventory (OCT 14)

532K

14:30

USD

DOE U.S. Distillate Inventory (OCT 14)

-2929K

GMT

Currency

Upcoming Events & Speeches

8:30

GBP

Bank of England Minutes

12:30

USD

Fed's Rosengren Speaks at Boston Fed Conference

18:00

USD

Fed Releases Beige Book Economic Survey

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

1.6100

86.00

0.9400

1.0785

1.0750

0.9020

112.00

126.50

Resist 1

1.3900

1.5925

81.50

0.9250

1.0675

1.0375

0.8750

108.00

123.00

Spot

1.3752

1.5713

76.82

0.8987

1.0141

1.0263

0.7956

105.65

120.71

Support 1

1.3150

1.5700

76.35

0.8500

0.9950

0.9400

0.7500

102.00

116.00

Support 2

1.3025

1.5525

75.50

0.7800

0.9750

0.9125

0.6850

100.00

114.00

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS & SCANDIES 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

13.3809

1.8573

7.9669

7.7767

1.2663

Spot

6.6315

5.4143

5.6121

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

1.3906

1.5912

77.07

0.9096

1.0324

1.0445

0.8090

106.98

122.34

Resist 1

1.3829

1.5813

76.94

0.9041

1.0233

1.0354

0.8023

106.31

121.53

Pivot

1.3741

1.5722

76.79

0.8994

1.0172

1.0236

0.7942

105.55

120.76

Support 1

1.3664

1.5623

76.66

0.8939

1.0081

1.0145

0.7875

104.88

119.95

Support 2

1.3576

1.5532

76.51

0.8892

1.0020

1.0027

0.7794

104.12

119.18

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

1.3967

1.5895

77.62

0.9141

1.0275

1.0448

0.8104

107.47

122.44

Resist. 2

1.3913

1.5850

77.42

0.9103

1.0242

1.0402

0.8067

107.02

122.01

Resist. 1

1.3860

1.5804

77.22

0.9064

1.0208

1.0356

0.8030

106.56

121.58

Spot

1.3752

1.5713

76.82

0.8987

1.0141

1.0263

0.7956

105.65

120.71

Support 1

1.3644

1.5622

76.42

0.8910

1.0074

1.0170

0.7882

104.74

119.84

Support 2

1.3591

1.5576

76.22

0.8871

1.0040

1.0124

0.7845

104.28

119.41

Support 3

1.3537

1.5531

76.02

0.8833

1.0007

1.0078

0.7808

103.83

118.98

v

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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