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Dollar Spilling Momentum Quickly as Holiday Trading Conditions Approach

Dollar Spilling Momentum Quickly as Holiday Trading Conditions Approach

2011-12-23 06:16:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Spilling Momentum Quickly as Holiday Trading Conditions Approach
  • Euro Ignores Downgrades, Only Specific Catalysts Can Move These Markets
  • British Pound’s Future Clouded by Recession Threat, EU Crisis Spill Over
  • Australian Dollar Follows Quiet Risk Trends as Volatility Expectations Fade
  • New Zealand Dollar Receives a Jolt as Christchurch Hit by Another Quake
  • Swiss Franc Taking SNB Threats More Seriously
  • Gold Retreating as Risk Slowly Rises – A Happenstance Correlation

Dollar Spilling Momentum Quickly as Holiday Trading Conditions Approach

It’s difficult to measure (as FX is decentralized), but liquidity is draining quickly for the currency market. While still exceptional deep compared to other asset classes, the absence of speculative participation dampens a lot of the swings that are based on forward-looking sentiment – in other words, the very thing that traders look to exploit. For the US dollar, the dampened speculative interest exacerbates the warping influences on price action - and it can even result in a slow, bearish trend. Fundamentally, the greenback’s trading-role in the currency market is its position as a reserve. We can think of this as taking our funds out of our investments, bypassing a low-yield savings account and going straight to the non-interest bearing deposit account. The dollar is prized for its liquidity. And, when volatility diminishes; there isn’t an absolute need liquidity.

To put market conditions in more concrete terms, we can take stock of the various ‘risk’ indicators available to us. The stock market’s favorite ‘fear’ gauge, the VIX Volatility Index dropped to 21.2 percent this past session – the lowest level in five months (just before the dramatic S&P 500 sell off through the end of July and into the open of August). For reference, the peak this August topped out at 48.0, the start of the European financial troubles with Greece’s first rescue reached 48.2 percent, and the peak of the global financial crisis in October 2008 maxed out at 89.5 percent. On these terms, it is fair to say that the market isn’t preparing for a financial collapse. Then again, shocks are borne out of a lack of expectation. For the FX market, the levels of expected volatility are running at comparable levels. Looking at a shorter time frame than the VIX (which naturally has a 30-day outlook), the implied volatility figures for EURUSD and GBPUSD over the coming week has dropped to lows not seen since April. Even the most active major (AUDUSD) is bouncing along five month lows – matching up to risk trends (the S&P 500).

There are very few things this far into the liquidity wind down that can spark the level of risk aversion needed to give the Dow Jones FXCM Dollar Index enough of a boost to threaten new highs for the year. Given the tolerance for the ECB’s liquidity pump (as a risk appetite booster), nothing short of a critical downgrade in the Euro Zone (sabotaging the effort to curb the crisis and opening the door for a global spread) or the failure of a critical bank in the global financial system could provide the necessary drive. Alternatively, as fear settles from the uncertainty that defined the past six months, there is a natural unwinding of safe haven flows and modest redistribution of capital – a slow, anti-dollar drift.

Related: Discuss the Dollar in the DailyFX Forum, Special Report: How Much Capital Should I Trade With?

Euro Ignores Downgrades, Only Specific Catalysts Can Move These Markets

Euro traders witnessed two European downgrades Thursday; but you wouldn’t know it from price action. Moody’s downgraded Slovenia (a Euro Zone member) a notched to A1 and left the country with a negative outlook. Meanwhile, EU member Hungary fell under the Standard & Poor’s rating knife with a cut to ‘junk’ status. Are these not important developments? For the individual countries, it certainly undermines their ability to raise necessary funding to balance their financial and economic health. Yet, for the broader euro-area, the tolerance for negative developments has hit tremendous pain thresholds. These changes simply don’t feed the core of the market’s fears – the accelerated deterioration of economic and monetary union. One of the few things that can accomplish that is a downgrade to one of the critical AAA-rated EZ members or the EFSF itself. Another concern to keep an eye on: resistance to calls for the banks to take deeper haircuts on their Greek debt holdings.

British Pound’s Future Clouded by Recession Threat, EU Crisis Spill Over

When fundamental changes occur over a longer time frame, their impact on currencies can be muted. That is certainly the case with the sterling which has held relatively steady despite the rapidly deteriorating outlook for economic activity and its returns. The 0.6 percent, final 3Q GDP reading released this past session reminds us of the threat of another recession (a risk voiced by a growing crowd). It was the BoE that suggested another pleasant surprise was less likely than a first half 2012 contraction. Then there is King’s consistent warning of the EU wave…

Australian Dollar Follows Quiet Risk Trends as Volatility Expectations Fade

Risk trends are still firmly in command of the Australian dollar’s bearing – it just so happens that sentiment fluctuations themselves are dying down. Looking at the implied volatility readings from the most volatile major, we see expected activity levels for AUDUSD are at five-month lows (corresponding to the benchmark risk-indicator, the S&P 500). A connection to risk trends can anchor as sure as it excites.

New Zealand Dollar Receives a Jolt as Christchurch Hit by Another Quake

New Zealand was delivered an unpleasant surprise with yet another earthquake striking outside of Christchurch. The second largest city in the country was devastated in a February tremor that has since added growth expectations through rebuilding. This could have delivered a severe blow to the kiwi in these thin trading conditions; but the 5.8 magnitude quake produced limited damage according to reports.

Swiss Franc Taking SNB Threats More Seriously

There may not be much traction in parliament to put through efforts to introduce negative rates and capital controls aimed at weighing the Swiss franc lower; but the market isn’t underestimating policy officials’ resolve after the EURCHF floor was put into place. The Swiss government and central bank may sit on their hands until the market forces them to react – perhaps a French downgrade that drives EURCHF towards 1.20?

Gold Retreating as Risk Slowly Rises – A Happenstance Correlation

Once again, we seem to have the negative correlation between gold and the S&P 500 that would suggest the commodity is playing the role of traditional safe haven. However, that is more coincidence than fundamental connection. Though panicked risk aversion isn’t in play currently, booking losses on long gold positions (and raising capital) works well into the year-end.

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

1:35

CNY

MNI December Flash Business Sentiment Survey

102

May improve on signs of easing

6:30

EUR

French Gross Domestic Product (QoQ) (3Q F)

0.4%

0.4%

Final revision expected flat, not expected to move markets

6:30

EUR

French Gross Domestic Product (YoY) (3Q F)

1.6%

1.6%

7:45

EUR

French Producer Prices (YoY) (NOV)

5.2%

5.8%

Expected slower producer prices points to easing scope possible

7:45

EUR

French Producer Prices (MoM) (NOV)

0.0%

0.5%

9:00

EUR

Italian Hourly Wages (MoM) (NOV)

0.0%

Italian labor markets weak, though wages continue to grow

9:00

EUR

Italian Hourly Wages (YoY) (NOV)

1.7%

9:30

GBP

Index of Services (MoM) (OCT)

-0.1%

0.1%

Service sector expected to fall again on lower spending

9:30

GBP

Index of Services (3Mo3M) (OCT)

0.3%

0.6%

9:30

GBP

BBA Loans for House Purchase (NOV)

35400

35295

UK housing market still weaker

10:00

EUR

Italian Consumer Confidence Index s.a. (DEC)

95.5

96.5

Drop moderating

13:30

USD

Cap Goods Ship Nondef Ex Air (NOV)

-1.1%

Goods orders expected to continue climb as US domestic economy improves

13:30

USD

Durable Goods Orders (NOV)

2.0%

-0.5%

13:30

USD

Cap Goods Orders Nondef Ex Air (NOV)

0.9%

-1.8%

13:30

USD

Durables Ex Transportation (NOV)

0.4%

1.1%

13:30

CAD

Gross Domestic Product (MoM) (OCT)

0.1%

0.2%

October GDP report expected weaker, following weaker US orders

13:30

CAD

Gross Domestic Product (YoY) (OCT)

2.7%

3.0%

13:30

USD

Personal Income (NOV)

0.4%

0.4%

Personal spending expected relatively flat despite reports of stronger retail

13:30

USD

Personal Spending (NOV)

0.3%

0.1%

13:30

USD

PCE Deflator (YoY) (NOV)

2.7%

2.7%

13:30

USD

PCE Core (MoM) (NOV)

0.1%

0.1%

13:30

USD

PCE Core (YoY) (NOV)

1.7%

1.7%

15:00

USD

New Home Sales (MoM) (NOV)

2.6%

1.3%

New home sales may be led by purchases of existing homes

15:00

USD

New Home Sales (NOV)

315K

307K

GMT

Currency

Upcoming Events & Speeches

15:00

USD

American Petroleum Institute Monthly Report

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

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

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.5846

1.8431

8.0982

7.7821

1.2914

Spot

6.7308

5.5582

5.7503

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 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

1.3590

1.5843

78.32

0.9393

1.0313

1.0393

0.7889

105.44

123.00

Resist. 2

1.3537

1.5797

78.13

0.9355

1.0281

1.0349

0.7855

105.01

122.60

Resist. 1

1.3484

1.5751

77.93

0.9316

1.0248

1.0305

0.7822

104.58

122.21

Spot

1.3377

1.5660

77.54

0.9239

1.0183

1.0216

0.7754

103.73

121.42

Support 1

1.3270

1.5569

77.15

0.9162

1.0118

1.0127

0.7686

102.88

120.63

Support 2

1.3217

1.5523

76.95

0.9123

1.0085

1.0083

0.7653

102.45

120.24

Support 3

1.3164

1.5477

76.76

0.9085

1.0053

1.0039

0.7619

102.02

119.84

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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