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Dollar Faces Another Surge of Volatility on Stimulus, Crisis Talk

Dollar Faces Another Surge of Volatility on Stimulus, Crisis Talk

2011-10-22 01:19:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Faces Another Surge of Volatility on Stimulus, Crisis Talk
  • Euro Trouble Masked by Dollar Decline, Market Demands Crisis Action
  • British Pound Takes Advantage of Greenback Vulnerability
  • Australian Dollar Extremely Sensitive to Risk Trends, Rate Potential in CPI Data
  • Japanese Yen: Will a Record Low USDJPY Prompt Officials Into Action
  • New Zealand Dollar Ready for RBNZ Policy Meeting, Are Surprises Possible?
  • Gold: Whether US Stimulus or European Crisis, Anti-Currency Drive Increasing

Dollar Faces Another Surge of Volatility on Stimulus, Crisis Talk

What a remarkable way to end the week – not just for the US dollar but for the entire financial markets. On the one hand, we have a number of developments that would point to a meaningful, bullish break for risk appetite trend. Yet, there are just as many considerations that indicate sentiment is still anchored by uncertainty over a troubled fundamental future. Which lean is correct? Are these fundamental developments or merely technical events evolving out of tense market conditions? These are critical questions to answer in order to properly navigate the markets next week. Yet, regardless of which of the conflicting bearings are ultimately correct; the chances of exceptionally active markets and even the long-awaited return to a dominant trend are very high. In other words, we are heading into a ‘trader’s’ market.

Why is it so difficult to determine where what the prevailing bias is for the dollar and risk trends next week? Though the various markets have been exceptionally correlated over the past weeks (anchored on risk appetite trends); there was a remarkable deviation to close this past week. Speaking to a strong recovery in risk appetite trends, we saw the S&P 500 (our favored benchmark for sentiment) finally break above the ceiling on two months of congestion. Yet, if we looked for confirmation outside this single performer; certainty starts to evaporate. Of the directly, risk-correlated dollar-based majors; only GBPUSD would follow up with a rally above 1.5900 to six month highs. This stand out performance alongside a critical USDJPY push to record lows would lead the Dow Jones FXCM Dollar Index (ticker = USDollar) to post its own critical break below 9,700 support; but this move more likely reflects a consideration more unique to the dollar than a true risk rally. If we look at EURUSD and AUDUSD as two of the more sensitive fundamental majors; neither produced an anti-dollar break of their own. Furthermore, we note that USDJPY and USDCHF (pairs that are comprised of two safe haven currencies) broke lower; while other Japanese yen and Swiss franc based crosses were steady or moved in favor of their haven currencies.

This brings us back to the impact of a unique dollar consideration: renewed speculation that the Federal Reserve will pursue a third round of stimulus in the foreseeable future. The dovish outlook gained traction Friday after Fed member Tarullo explicitly stated support for additional, large-scale mortgage backed security (MBS) purchases to help lower mortgage rates and thereby boost the economy. We have heard other officials say they are keeping their list of options open; but this was a blatant call. Nevertheless, one person’s voice does not make a majority and guarantee action. This may have sparked an anti-dollar push and hope amongst equity holders; but to keep it going, we will need something tangible. In the week ahead, we have a critical EU summit that looks to curb a global crisis and US 3Q GDP. The stakes are high.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: Incredible Trade Potential in EURUSD and S&P 500 Divergence

Euro Trouble Masked by Dollar Decline, Market Demands Crisis Action

Looking at EURUSD, it would seem like the euro was doing exceptionally well Thursday; but that is just a good reminder that we need to look at multiple signs in order to develop a full picture of fundamentals. The market’s most liquid currency pair was unable to overtake critical resistance; while other euro crosses were in fact under significant pressure. Backing out the dollar’s influence, the shared currency was dealing with an update from the Troika that stated that Greece would need to be offered no-collateral, 6 percent bonds while private investors take a 50 percent haircut in order for the country to reach 120 percent debt-to-GDP by 2020. That is set against the backdrop for EU leaders to extend their summit from this Sunday out to Wednesday. Will they be able to fortify the EFSF, work out recapitalizing banks and up private haircuts?

British Pound Takes Advantage of Greenback Vulnerability

Aside from the other safe haven currencies (the yen and franc), the sterling was the only currency to make a clean bullish break against the US dollar. Why would the pound succeed where the euro and Aussie dollar failed? Considering the UK is in the same positions of stimulus expansion, the promise of even footing helped leverage its performance. Expect GBPUSD to fall back into line promptly next week.

Australian Dollar Extremely Sensitive to Risk Trends, Rate Potential in CPI Data

The risk backdrop will be very active through the coming week, and therefore so too will the Aussie dollar face volatility. First and foremost, we will need to watch the balance of risk appetite versus risk aversion as the hope of US stimulus meets the reality of a European financial crisis. In the meantime, an economic listing could shift the Aussie dollar’s sensitive to risk trends with CPI data that can amplify rate expectations.

Japanese Yen: Will a Record Low USDJPY Prompt Officials Into Action

Japanese government officials and central bankers may be nervous. Though it was painful, there was an inherent relief in USDJPY’s congestion between 77.50 and 76.50. That fragile peace was shattered however with the dollar’s hit on stimulus speculation; and it will further come under pressure next week as the EU meets. Will they risk allowing the yen to simply ride the prevailing winds or fortify it for insurance?

New Zealand Dollar Ready for RBNZ Policy Meeting, Are Surprises Possible?

Just this past week, RBNZ Governor Bollard said in a statement that reconstruction spending would boost growth and inflation, thereby reducing the need for further stimulus. That will naturally curb dovish expectations for this coming week’s rate decision; but that does not preclude the possibility of a rate cut. If Bollard clarifies by suggesting a rate cut could still be entertained; it will have a heavy impact on the kiwi.

Gold: Whether US Stimulus or European Crisis, Anti-Currency Drive Increasing

Will the US step up and try to stabilize the global financial markets or will the European Union do its part to announce a grand bailout scheme? Regardless, the impact on government backed assets will be the same. Confidence will erode and capital will shift to an asset that is both considered ‘safe’ and can keep its value: gold. Friday left us with a slow advance; but it could build quickly next week.

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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

23:50

JPY

Merchandise Trade Balance Total (SEP)

-777.2B

Merchandise exports may continue to falter on strong yen; imports may largely consist of raw materials

23:50

JPY

Adjusted Merchandise Trade Bal. (SEP)

-294.4B

23:50

JPY

Merchandise Trade Exports YoY (SEP)

2.8

23:50

JPY

Merchandise Trade Imports YoY (SEP)

19.2B

0:30

AUD

Producer Price Index (QoQ) (Q3)

0.8%

PPI has been controlled by high interest rates; could lower rate expectations further

0:30

AUD

Producer Price Index (YoY) (Q3)

3.4%

5:00

JPY

Supermarket Sales (YoY) (SEP)

-2.2%

Supermarket sales remain sluggish

7:00

EUR

French PMI Manufacturing (OCT P)

48.2

Many PMI of sectors already entering contraction; will weigh on any further ECB attempts to maintain price stability

7:00

EUR

French PMI Services (OCT P)

51.5

7:30

EUR

German PMI Manufacturing (OCT A)

50.3

7:30

EUR

German PMI Services (OCT A)

49.7

8:00

EUR

Eurozone PMI Composite (OCT A)

49.1

8:00

EUR

Eurozone PMI Manufacturing (OCT A)

48.5

8:00

EUR

Eurozone PMI Services (OCT A)

48.8

9:00

EUR

Eurozone Industrial New Orders NSA (YoY) (AUG)

8.4%

New orders could be helped by demand for German exports

9:00

EUR

Eurozone Industrial New Orders SA (MoM) (AUG)

-2.1%

12:30

USD

Chicago Fed Nat Activity Index (SEP)

-0.43

Midwest manufacturing may see additional weakness

21:45

NZD

Consumer Prices (QoQ) (Q3)

1.0%

Higher Q3 inflation may hasten the RBNZ’s rate cut reversal

21:45

NZD

Consumer Prices (YoY) (Q3)

5.3%

23:00

AUD

Conference Board Leading Index (AUG)

-0.1%

Australian leading index lower on views of a slowing China

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

1.3863

1.5941

76.15

0.8848

1.0089

1.0335

0.8020

105.57

121.39

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

13.6763

1.8378

8.0826

7.7815

1.2738

Spot

6.5830

5.3708

5.5678

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

1.4020

1.6094

77.40

0.9003

1.0236

1.0463

0.8110

106.64

122.71

Resist 1

1.3941

1.6017

76.77

0.8926

1.0162

1.0399

0.8065

106.10

122.05

Pivot

1.3823

1.5886

76.30

0.8874

1.0115

1.0301

0.7983

105.57

121.43

Support 1

1.3744

1.5809

75.67

0.8797

1.0041

1.0237

0.7938

105.03

120.77

Support 2

1.3626

1.5678

75.20

0.8745

0.9994

1.0139

0.7856

104.50

120.14

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

1.4083

1.6127

76.96

0.9001

1.0223

1.0526

0.8173

107.47

123.17

Resist. 2

1.4028

1.6080

76.76

0.8963

1.0190

1.0479

0.8135

107.00

122.73

Resist. 1

1.3973

1.6034

76.56

0.8924

1.0156

1.0431

0.8097

106.52

122.28

Spot

1.3863

1.5941

76.15

0.8848

1.0089

1.0335

0.8020

105.57

121.39

Support 1

1.3753

1.5848

75.74

0.8772

1.0022

1.0239

0.7943

104.62

120.50

Support 2

1.3698

1.5802

75.54

0.8733

0.9988

1.0191

0.7905

104.14

120.06

Support 3

1.3643

1.5755

75.34

0.8695

0.9955

1.0144

0.7867

103.67

119.61

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.

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

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