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Dollar Closes Three Year High as QE3 Taper Fears Return

Dollar Closes Three Year High as QE3 Taper Fears Return

2013-05-29 04:46:00
John Kicklighter, Chief Strategist
Share:
  • Dollar Closes Three Year High as QE3 Taper Fears Return
  • Euro Awaits EU Policy Recommendations for Spain, Cyprus, Slovenia
  • Japanese Yen Retreats from Key Breakout Ahead of BoJ Participants
  • Australian Dollar: AUDUSD, AUDCAD Threaten Critical Break Lower
  • Swiss Franc Shows Remarkable Volatility after Data, Banking Concerns
  • Canadian Dollar: Should Traders be Suspicious of BoC Rate Decision?
  • Gold Surprisingly Holds Congestion Despite Dollar, Treasury Volatility

Dollar Closes Three Year High as QE3 Taper Fears Return

The dollar posted an impressive performance this past session with a positive showing versus all of its major counterparts on an unexpected outbreak in QE3 tapering fear. We certainly saw speculation of a stimulus shift from the Federal Reserve in the Dow Jones FXCM Dollar Index’s (ticker = USDollar) committed 56 point advance to its highest close since July 2010. However, we don’t appreciate the full scope of the underlying groundswell unless we look across the asset spectrum. At the high end of risk appetite, the S&P 500 – despite closing higher on the day – suffered a substantial intraday reversal. Meanwhile, the US 10-year Treasury note came under intense selling pressure. Taken together, these three reflect the market’s sensitivity to stimulus easing and the severe implications for something far more critical: risk aversion.

While the top economic release for the US docket this past session – the Conference Board Consumer Confidence survey – is useful for directing growth expectations, it doesn’t often tap into the deeper currents market-wide sentiment. Yet, the market backdrop has changed the circumstances for what is important to traders. While the dollar has reflected on early expectations of the Fed’s eventual reduction – and ultimate end – in stimulus support for some time, the markets where the yield chase has proven more rampant have only recently caught on. Last week, both the FOMC minutes from the May 1 policy meeting and testimony by Fed Chairman Ben Bernanke offered evidence to preoccupied stimulus-fattened bulls that an end to the limitless backstop was on the horizon. The shock of volatility to equity markets proved traders were paying attention. When the May confidence survey hit its highest level since February 2008 with notable improvement in the employment measure, the US Treasury market took the most severe QE-exit hit with the biggest tumble in months.

The tremor that yesterday’s typically ordinary indicator generated in the broader financial markets is testament to just how transfixed investors are on the possibility that the Fed will rein in its support and what it means for richly priced assets that are running on near-record low rates of return. Consequently, the upcoming speech by Boston President Fed Rosengren should be monitored closely by all traders – not just those dealing with the dollar. Given the attention paid to QE3; it could be the source of the next market-wide, risk-derived structural trend.

Euro Awaits EU Policy Recommendations for Spain, Cyprus, Slovenia

There was plenty of notable event risk and speeches on the docket for euro traders to watch this past session, but headlines proved incapable of spurring the currency to a meaningful drive. That will not likely be the case for the upcoming session. Where the fundamentals of the past session (record plunge in Spanish mortgage approvals, Germany backtracking on growth support, ECB’s Noyer voicing doubts of further easing capabilities) were noteworthy, they aren’t the caliber necessary to shake investors out of the ‘stable markets and asset bid’ catatonia that seems cyclical. Wednesday’s event risk on the other hand is far more effectual in that regard. German employment and CPI figures will be good for short-term volatility – especially as the ECB seems more attuned to German inflation. Yet, the real potential resides with the EU’s annual policy recommendations for all of its members. Of particular interest is the assessment of Slovenia’s and Cyprus’ stabilization efforts. Also crucial are the approval of extra time for France, Spain and Italy to reach the target deficit-to-GDP ratios.

Japanese Yen Retreats from Key Breakout Ahead of BoJ Participants

Yen traders were unable to capitalize on the tantalizingly close resistance that has loosely kept the currency from retracing a substantial portion of its near 30 percent tumble over the past seven months. Absent was a clear and committed collapse in risk appetite trends. Without the threat of capital losses, the tepid yield and increasingly-exhausted vows of intervention by Japanese officials held the dam. Yet, questions are starting to arise as the effectiveness of monetary policy. The BoJ will weigh in on this particular topic at a meeting with investors (7:00 GMT).

Australian Dollar: AUDUSD, AUDCAD Threaten Critical Break LowerThe Australia dollar was a mixed bag Tuesday, but the currency found itself under heavy selling this morning. A drop across the board showed a concentrated hit to the ‘carry currency’, but the move wasn’t induced by data. Nor does the drive seem to be the direct result of risk-derived carry trade unwind - otherwise the yen crosses would have shown similar. The heaviest morning, volume swell in Aussie futures since Thursday speaks to speculative interest and perhaps further reserve diversification away from the recently popular reserve currency.

Swiss Franc Shows Remarkable Volatility after Data, Banking Concerns

Throughout 2012, the Swiss franc wasn’t in control of its own fate. A EURCHF anchor at 1.2000 meant the currency’s direction and momentum were often the by-product of Euro-area fundamentals. The USDCHF’s volatility this past session suggests the franc is no longer relinquishing control. Part of the tumble for the currency was the responsibility of the April trade balance which posted the biggest drop in exports in four years. Perhaps far more troublesome though is the systemic implications of another Swiss bank (Julius Baer) handing over US client data.

Canadian Dollar: Should Traders be Suspicious of BoC Rate Decision?

Both the RBA and ECB surprised at recent policy meetings with interest rate cuts. The list of central banks easing policy in an unspoken effort to manipulate their currency is growing. Under these conditions, it isn’t implausible to expect the Bank of Canada to join the fray by at least abandoning its warning that a rate hike is down the road. The central bank meets Wednesday for Carney’s last gathering at the helm.

Gold Surprisingly Holds Congestion Despite Dollar, Treasury Volatility

The US dollar has closed at a three-year high and US Treasuries have tumbled over the fear that the pre-steps to a Fed stimulus exit are in place. And yet, the market’s favorite alternative to fiat currency – and specifically the US dollar as the asset class’s standard – has held tight congestion. Gold has managed to hold its closing wedge between $1,400 and $1,375 as volume refrains from a return to the form of last week. Meanwhile, ETF selling continues and volatility in currency and interest rate markets doesn’t look like it will simply recede.

**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

0:00

AUD

CBAHIA House Affordability

68.9

Steady uptrend since recession.

0:30

AUD

Westpac Leading Index (MoM)

0.60%

Reached 06/12 high, lower interest rate may further boost growth.

1:30

AUD

Construction Work Done

-0.10%

Follows predictable patterns.

6:00

CHF

UBS Consumption Indicator

1.25

Uptrend for 3-consecutive months.

7:55

EUR

German Unemployment Change

4K

Unemployment change has stabilized since 2012 at around 7%, lower rate by ECB could encourage employers to hire more.

7:55

EUR

German Unemployment Rate s.a.

6.90%

8:00

EUR

Euro-Zone M3 s.a. (YoY)

2.60%

Dropped to 09/12 low; Lower M3 indicates tightening liquidity in Eurozone.

8:00

EUR

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

3.00%

10:00

GBP

CBI Reported Sales

-1

Declined to eight-month low, continual struggles in service sector may provide evidence for BOE to expand easing.

11:00

USD

MBA Mortgage Applications

Indicative of housing demand.

12:00

EUR

German Consumer Price Index (YoY)

1.20%

GE’s CPI hits 2.5- year low; ECB would place more focus on the harmonized CPI figure, which declined from 1.8% to 1.1%. Continual decline could allow more room for ECB to ease monetary policy further.

12:00

EUR

German CPI - EU Harmonised (MoM)

-0.50%

12:00

EUR

German CPI - EU Harmonised (YoY)

1.10%

12:00

EUR

German Consumer Price Index (MoM)

-0.40%

12:30

CAD

Average Weekly Earnings (YoY)

Rebounded to 09/12 level, higher earnings may lead to higher inflation.

14:00

CAD

Bank of Canada Rate Decision

1.00%

1.00%

Last meeting under the administration of Mark Carney, markets expected interest rate to remain unchanged.

22:45

NZD

Building Permits (MoM)

-9.10%

Subject to seasonal patterns.

23:50

JPY

Japan Buying Foreign Bonds (Yen)

-¥804.4B

If volatility in the Japanese equity and bond market last week have troubled international investors, the evidence will be seen in these figures

23:50

JPY

Foreign Buying Japan Stocks (Yen)

¥716.0B

23:50

JPY

Japan Buying Foreign Stocks (Yen)

-¥136.9B

23:50

JPY

Foreign Buying Japan Bonds (Yen)

¥17.7B

GMT

Currency

Upcoming Events & Speeches

00:00

JPY

Bank of Japan Gov. Kuroda speaks at BOJ conference

07:00

JPY

BoJ to Speak with Market Participants about Recent Developments

-:-

EUR

EU Makes Annual Economic Policy Recommendations

09:00

EUR

OECD May Economic Outlook

09:15

EUR

ECB Announces Allotment of 3-Month Refinancing Tender

14:00

EUR

Portugal Parliament to Debate Govt’s Spendings Cuts

17:00

USD

Fed's Rosengren Speaks on Economy in Minneapolis

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

9.7000

7.8075

1.3250

Resist 1

6.8155

5.8300

5.8620

Spot

12.6285

1.8610

9.8239

7.7640

1.2682

Spot

6.7154

5.7954

5.8948

Support 1

12.0000

1.6500

8.9500

7.7490

1.2000

Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.7750

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

1.2975

1.5156

103.45

0.9852

1.0492

0.9676

0.8169

133.12

155.34

Resist. 2

1.2947

1.5125

103.11

0.9825

1.0471

0.9650

0.8144

132.67

154.88

Resist. 1

1.2918

1.5093

102.78

0.9799

1.0449

0.9624

0.8119

132.23

154.42

Spot

1.2860

1.5030

102.12

0.9745

1.0407

0.9571

0.8069

131.33

153.49

Support 1

1.2802

1.4967

101.46

0.9691

1.0365

0.9518

0.8019

130.43

152.57

Support 2

1.2773

1.4935

101.13

0.9665

1.0343

0.9492

0.7994

129.99

152.11

Support 3

1.2745

1.4904

100.79

0.9638

1.0322

0.9466

0.7969

129.54

151.65

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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