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Dollar Fails to Break EUR/USD’s 1.2750 Support as Risk, QE3 Fears Steady

Dollar Fails to Break EUR/USD’s 1.2750 Support as Risk, QE3 Fears Steady

John Kicklighter, Chief Strategist
  • Dollar Fails to Break EUR/USD’s 1.2750 Support as Risk, QE3 Fears Steady
  • Japanese Yen Surge Tracking – Not Leading – Nikkei 225 Tumble
  • Euro Finds a Mixed Bag as PMI Figures Pick Up, Spanish Bond Demand Slows
  • Australian Dollar Refuses to Jump Start Serious Recovery
  • British Pound Slides after GDP Details Show Weak 1Q Triple Dip Miss
  • New Zealand Dollar Slide Continues but Hardly Accelerates on Weak Trade Data
  • Gold Establishes Range Below $1,400, Awaits Dollar’s Move

Dollar Fails to Break EUR/USD’s 1.2750 Support as Risk, QE3 Fears Steady

Stimulus will end…eventually. And, this realization sent a shudder through the market when both the FOMC minutes and Federal Reserve Chairman Bernanke noted that the central bank will likely temper QE3 in the coming months. Yet, how sensitive are the markets to this eventuality? If it was the mere recognition of the end to perpetual expansion of the Fed’s balance sheet that would spur speculators to abandon ship, we would have seen the S&P 500 build its sharp reversal Wednesday into a persistent trend and found the dollar driving EURUSD below 1.2750. Yet, neither critical escalation was realized this past session. The benchmark equity index closed its first back-to-back decline in five weeks; but it would also posts its biggest intraday, bullish recovery this year. Meanwhile, the combination of risk and money supply (the supply-and-demand aspect of balance sheet building) wouldn’t prevent the greenback from dropping against all of its major counterparts Thursday. Yet, despite the offsetting effort, neither investor sentiment nor dollar appetite are secure.

Though initially lost in the pang of fear Wednesday, both Bernanke and the minutes presented a case for maintaining the status quo at least through the immediate future. The central bank Chairman did suggest that a reduction in purchases may be in the cards over the coming months, but he also stated clearly that withdrawal too quickly could stall the recovery – an outcome any policy authority looks to avoid. Similarly with the transcript from the last FOMC gathering, the note of “some” members suggesting a tapering as early as June doesn’t overwhelm the “many” that said a downward shift in policy would require more progress. In a majority vote, the numbers are clear. Adding to sense of moderation the past session, St Louis Fed President Bullard reiterated his belief that the Fed isn’t “that close” to easing its support. Given these assumptions, the eventual taming of the QE3 stimulus program will depend heavily on the data over the coming weeks.

As ambiguous as the Fed is looking to be and hesitant as they are to make the first move to leveling off, a few additional months of $85 billion Treasury and MBS purchases won’t necessarily ensure risk appetite’s buoyancy. The divergence between exposure at these record market levels and the traditional fundamentals behind investing is extreme. Given the historical low in benchmark global rates, commitment to the highs in capital markets and carry necessitates arid volatility levels and steady capital gains (rising prices for buy-and-hold investors). It doesn’t take much for early profit taking to devolve into committed selling under these conditions. And, we don’t need a heavy-handed signal for that…

Japanese Yen Surge Tracking – Not Leading – Nikkei 225 Tumble

Volatility behind the yen, Nikkei 225 and 10-year Japanese Government Bond (JGB) yield has soared over the past 24 hours. And, what makes this particularly worrisome is that the increased turnover looks like it may be semi-permanent. In the wake of the Bank of Japan’s policy meeting where they announced a wait-and-see approach with their objective to increase the nation’s monetary base by ¥60-70 trillion, there is a distinctive risk that a dependence on constant escalation can scare the traders off. A steady appetite for JGBs, ETFs and J-REITs from the BoJ can keep the ship steady; but any troublesome weather will capsize carry trades that currently provide record low yields after having rallied 25 percent up from record lows. Doubt is already set in. The Nikkei 225’s attempt to retrace some of its incredible 1,110-pip loss Thursday has already fallen apart. Renewed selling through Friday’s session has pulled the benchmark index to a 10 percent drop from yesterday’s peak.

Euro Finds a Mixed Bag as PMI Figures Pick Up, Spanish Bond Demand Slows

The euro struggled to produce its own move. The currency’s biggest loss was found against the yen while its heartiest jump was won versus another safe haven – the dollar. The same split was noted between higher yielding currencies. From the euro docket, the regional PMI figures (treated as timely updates on growth trends) printed better than expected. The Eurozone Composite beat with a 47.7 reading, but it is important to remember that this is still a measure pointing to economic contraction. Meanwhile, the effort to take advantage of passive markets seems to be hitting a barrier. Spain recorded the first increase in yields and drop in demand in three months during a sale of 3, 5 and 13-year bonds.

Australian Dollar Refuses to Jump Start Serious RecoveryRisk trends made a bid to recover lost ground this past session, but the Australian dollar’s effort to ride this move’s coattails fell apart rather quickly. Furthermore, the highest benchmark-yield major never really gained traction against safe haven counterparts – indicating individual weakness beyond carry unwind. It is worth noting that the AUDUSD’s correlation to the S&P 500 is the most extreme, negative seen in nearly a decade. Meanwhile, open interest in Aussie government bond futures has advanced to 2008 highs – an indication of hedging losses?

British Pound Slides after GDP Details Show Weak 1Q Triple Dip Miss

The United Kingdom barely avoided the painful label of a triple dip recession, but the economy doesn’t seem to be seeing much of the recovery that truly matters. With the second reading of the 1Q GDP figures released this past session, we were given details on performance. Personal spending and government spending slowed, while exports and investment both actually contracted. A Triple Dip in spirit perhaps.

New Zealand Dollar Slide Continues but Hardly Accelerates on Weak Trade Data

Trade is New Zealand’s bread and butter growth-wise, but there was little strength to be found in the April figures that crossed the wires this morning. The trade balance figures for last month printed NZ$157 million – the biggest miss of the consensus forecast in years and a reversal from the two-year high from the previous month. Despite the negative implications, the kiwi’s controlled decent held retrained.

Gold Establishes Range Below $1,400, Awaits Dollar’s Move

A 1.5 percent rally from gold sounds good on paper, but a quick look at the charts shows us that the move was hardly productive. Once again, we are faced with a well-defined bout of congestion below $1,400 that will likely ward off any casual trending. The metal needs a dedicated drive that spurs commitment. Given that the Fed seems on the path of an eventual tempering of policy while the BoJ has hit its near-term limit, the catalyst for a bid on $1,800 seems out of reach. In the meantime, a dollar-borne selloff for the metal simply requires risk aversion.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

6:00

EUR

German Gross Domestic Product n.s.a. (YoY)

-1.4%

-1.4%

Steady decline since 5Y high of 5.2% on 3/11

EUR

German Gross Domestic Product s.a. (QoQ)

0.1%

0.1%

Large swings in data set; 1Y avg. 0.0%; High: 0.3%; Low: -0.6%

6:00

EUR

German Gross Domestic Product w.d.a. (YoY)

-0.2%

-0.2%

Downward trend since 5Y high of 4.8% on 3/11

6:00

EUR

German Construction Investment

-1.2%

-0.1%

GE Q1 GDP grew less than forecast and Italy and France deteriorated in a faster pace, domestic demand will be subdued.

6:00

EUR

German Domestic Demand

0.1%

0.2%

6:00

EUR

German Imports

-0.9%

-0.6%

As GE avoided a contraction in Q1, exports are likely to exceed imports during the same period.

6:00

EUR

German Exports

-0.6%

-2.0%

6:00

EUR

German Private Consumption

0.3%

0.1%

1Y avg. 0.1; High 0.2; Low 0.0.

6:00

EUR

German GfK Consumer Confidence Survey (JUN)

6.2

6.2

2-year modest uptrend despite sluggish growth.

8:00

EUR

German IFO - Business Climate

104.4

104.4

GE central park expected a stronger second quarter overall, not only in construction sector; Optimistic comments ma boost business confidence and expectation.

8:00

EUR

German IFO - Current Assessment

107.2

107.2

8:00

EUR

German IFO - Expectations

101.6

101.6

8:30

GBP

BBA Loans for House Purchase

32800

31227

Indicative of UK housing demand.

12:30

USD

Cap Goods Ship Nondef Ex Air

-0.3%

0.5%

Measure of companies’ investment plan as it includes industrial machinery and computers; Budget cuts impacts on producers’ sentiment likely to level off.

12:30

USD

Cap Goods Orders Nondef Ex Air

0.5%

-0.6%

12:30

USD

Durable Goods Orders

1.5%

-6.9%

Items last for at least three years; Typical has large fluctuation, less weight is on MoM data.

12:30

USD

Durables Ex Transportation

0.5%

-2.9%

GMT

Currency

Upcoming Events & Speeches

1:45

CNY

Chinese MNI Business Sentiment Indicator (MAY)

2:55

JPY

Bank of Japan Governor Kuroda speech at Nikkei Conference

7:00

EUR

EU’s Barnier Speaks on Financial Regulation

7:00

GBP

BoE Member Fisher Speaks

10:00

EUR

ECB Announces 3-Year LTRO Repayments

10:00

EUR

ECB’s Weidmann Speaks

11:30

GBP

BoE’s King Participates in Debate on Financial Crisis

15:45

EUR

EU’s Rehn Speaks on Financial Regulations

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 18:00 GMT

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

15.0000

2.0000

9.8365

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

9.5500

7.8075

1.3250

Resist 1

6.8155

5.8300

5.8620

Spot

12.4382

1.8476

9.5566

7.7630

1.2673

Spot

6.6561

5.7709

5.8339

Support 1

12.0000

1.6500

8.7750

7.7490

1.2000

Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.5650

7.7450

1.1800

Support 2

5.8085

5.4440

5.3040

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

1.3033

1.5204

103.54

0.9813

1.0418

0.9760

0.8174

133.84

155.94

Resist. 2

1.3004

1.5172

103.21

0.9786

1.0398

0.9734

0.8149

133.39

155.48

Resist. 1

1.2975

1.5140

102.88

0.9760

1.0377

0.9707

0.8124

132.94

155.03

Spot

1.2917

1.5075

102.23

0.9707

1.0336

0.9654

0.8073

132.05

154.11

Support 1

1.2859

1.5010

101.58

0.9654

1.0295

0.9601

0.8022

131.16

153.20

Support 2

1.2830

1.4978

101.25

0.9628

1.0274

0.9574

0.7997

130.71

152.74

Support 3

1.2801

1.4946

100.92

0.9601

1.0254

0.9548

0.7972

130.26

152.29

v

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

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

Sign up for John’s email distribution list, here.

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

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