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Dollar Gains Checked by Rebound in Risk, Collapse in Volatility

Dollar Gains Checked by Rebound in Risk, Collapse in Volatility

2014-05-22 03:49:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar Gains Checked by Rebound in Risk Collapse in Volatility
  • Euro Traders Look to Data to Shape Stimulus Expectations
  • Japanese Yen Crosses Checked Higher Before USDJPY Gives Way

Dollar Gains Checked by Rebound in Risk, Collapse in Volatility

A 0.1 percent retreat from the Dow Jones FXCM Dollar Index (ticker = USDollar) is mild considering the breadth of the ‘risk on’ sentiment this past session. Both speculative appetites and dollar selling are kept in check by conviction – or a lack thereof. Each time there is tentative evidence of the market’s faith building behind the next wave of capital inflow into the speculative / high-yield realm, we find the effort quickly curbed before momentum has a chance to catch traction. This has left the S&P 500 and US equity indexes to amble for fourth months, a divergence for global stock markets and a notably weaker condition for FX-based carry trade. Between a multi-year bull trend and the recent rise of doubt, we have found the trading ranks shift heavily towards the short-term speculator. Opportunists who are looking for short-term dips in price or jumps in volatility to exploit. The question is how long speculative appetites can subsist on these scraps.

As of late, the short-term swing traders’ ability to squeeze trades out of these brief adjustments has collapsed to anemic levels. The equity-based VIX implied (expected) volatility measure closed below 12 percent this past session. That has only happened two other times over the past 7 years. Dollar traders should keep a close eye on any abrupt changes in activity level moving forward as extremes rarely last. In the absence of a systemic ‘risk’ move though, rate speculation is still guiding price. The FOMC minutes were top risk this past session and PMI data ahead.

Euro Traders Look to Data to Shape Stimulus Expectations

A late rebound from EURUSD saved the pair from a possible upgrade to the pair’s nascent bear trend. Dropping down to test the pair’s 200-day moving average (we’ve held above it for 8 months running), a hawkish ECB member offered up commentary that conflicted with the steady flow of stimulus rumination we have heard from the group over the past few months. Bundesbank President Jens Weidmann remarked that no decisions for the June ECB meeting were already expected, that deflation was not a perceivable risk and that an outright QE program was unlikely. While that doesn’t move us off the path of more accommodation in two weeks, it does keep the market off balance and certitude. Also in the news, a Bundesbank member joined the open concern among central bankers over the risk of extreme low volatility conditions.

Japanese Yen Crosses Checked Higher Before USDJPY Gives Way

As expected, the Bank of Japan held its bearings on monetary policy. This the market has prepared for. What is not fully priced in for the Yen and Japanese capital markets is the particular chances of greater monetary accommodation moving forward. From the statement that accompanied the policy decision and BoJ Governor Kuroda’s press conference, the sentiment was optimism and an expectation for current policy to lead the economy to recovery and inflation to its 2 percent target without additional measures. Keeping the option open in not a strong Yen cross buoy. However, a possible focus on exchange rates may still feed hope of a QE upgrade if the Yen crosses correct.

British Pound Climbs after BoE Minutes, Retail Sales Reinforce Rate Hike Calls

The modest beat from the UK consumer inflation reading Tuesday was met with limited optimism amongst Pound bulls. However, with a modest but tangible upgrade in tone from the BoE minutes and significant beat from the retail sales report; the currency started to move. Though this is hardly breakout velocity – and we likely do need that kind of conviction to push beyond 1.7000 on GBPUSD – the advance was material in low volatility conditions. We’ll see if the details of the 1Q GDP figure and CBI manufacturing activity report can further yields and the Sterling.

Australian Dollar, Chinese Yuan Climb Slowly After Strong PMI Reading

Wage inflation through 1Q in Australia hovered at extraordinarily low levels of growth and consumer confidence softened last month. That was what data from the docket offered the Aussie dollar. Nevertheless, the currency managed to edge higher. This morning’s substantial Chinese PMI manufacturing beat presents a far more convincing driver. AUD is up against all of its counterparts and the Chinese Offshore Renminbi (CNH) has found modest gains versus the US Dollar for a third straight day on the number – which is still in contractionary territory at 49.7.

Emerging Markets Take Part in Speculative Risk Bid

Emerging market currencies advanced broadly against the benchmark US dollar Wednesday as the MSCI Emerging Market ETF posted a 0.8 percent jump of its own to 42.92. Though a wide-ranging move, the conviction for the segment met the same limitations as the general risk sentiment. The ETF has struggled to advanced beyond a six-month high of 43, while the liquid currencies from the designation (Brazilian Real, Turkish Lira, South African Rand) have spent the past two weeks meandering. In the upcoming session, the employment statistics from Russia and Brazil may add volatility to the BRICS.

Gold’s Range Narrows to $20, Activity Reading Nears Multi-Year Lows

Activity levels behind gold trading continue to recede, leaving the market to deal with a diminishing range. The exponential average true range – emphasizing more recent price action – for the past trading month has dropped to lows that have defined the floor on volatility back to late 2010. That suggests the $20 band of market range the precious metal is currently tracking out will eventually break. However, just like risk trends in the financial markets, recognition of the exceptional conditions does not inherently mean they are obligated to revert. A rebound in global yields may help force the break if it draws with it inflation and/or interest rate speculation. Meanwhile, volume on the main SPDR Gold Shares ETF jumped while total ETF holdings dropped to a fresh four-and-a-half year low of 55.302 million ounces.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:35

JPY

Markit/JMMA PMI Manufacturing (MAY P)

49.4

Factory activity measure plunged to a14 month low with the tax hike

1:45

CNY

HSBC PMI Manufacturing (MAY P)

48.3

48.1

This concept tracks sentiment and 48.0 marks the lowest level for 2014. A disappointing print here is fuel to the fire that the Tiger economy is slowing down.

3:00

NZD

RBNZ 2-Year Inflation Expectation (2Q)

2.33%

Inflation expectations have held close to 2% despite the RBNZ turn to hikes

6:45

EUR

French Business Confidence Indicator (MAY)

100

100

French business confidence gauge is near 2-year highs.

6:45

EUR

French Business Confidence (MAY)

94

94

7:00

EUR

French Markit PMI Composite (MAY P)

50.5

50.6

The euro is already under pressure as the case for ECB stimulus continues to build. A miss here will certainly strengthen the case, but an upbeat outcome is unlikely to sway ECB policy makers.

7:30

EUR

German Markit PMI Manufacturing (MAY P)

54.0

54.1

7:30

EUR

German Markit PMI Services (MAY P)

54.5

54.7

8:00

EUR

Euro-Zone Markit PMI Manufacturing (MAY P)

53.2

53.4

8:00

EUR

Euro-Zone Markit PMI Services (MAY P)

53.0

53.1

8:00

EUR

Euro-Zone Markit PMI Composite (MAY P)

53.9

54.0

8:30

GBP

Public Finances (PSNCR) (Pounds) (APR)

15.7B

This concept tracks the net amount of money a government needs to finance its budget deficit.

8:30

GBP

Gross Domestic Product (QoQ) (1Q P)

0.8%

0.8%

Gross Domestic Product is a critical figure for GBP and UK economy as it measures economic growth. A strong print here may support the GBP.

8:30

GBP

Gross Domestic Product (YoY) (1Q P)

3.1%

3.1%

8:30

GBP

Private Consumption (1Q P)

0.6%

0.4%

10:00

GBP

CBI Trends Total Orders (MAY)

3

-1

This concept tracks business sentiment is and has fallen sharply from 2014 high of 20.0.

10:00

GBP

CBI Trends Selling Prices (MAY)

10

9

12:30

CAD

Retail Sales (MoM) (MAR)

0.3%

0.5%

This indicator gauges domestic consumption, and is expected to fall a 1-month low.

12:30

CAD

Retail Sales Less Autos (MoM) (MAR)

0.4%

0.6%

12:30

USD

Chicago Fed National Activity Index (APR)

0.2

Recent news-flow coming out of the U.S. has been better-than-expected. Overall upbeat data may support the U.S. Dollar as it supports Fed’s argument that the U.S economy is picking up, and squashes any doubts for a pause in tapering.

12:30

USD

Initial Jobless Claims (MAY 17)

297K

12:30

USD

Continuing Claims (MAY 10)

2667K

13:45

USD

Markit PMI Manufacturing (MAY P)

55.5

55.4

14:00

USD

Existing Home Sales (APR)

4.67M

4.59M

14:00

USD

Existing Home Sales (MoM) (APR)

1.8%

-0.2%

14:00

USD

Leading Indicators (APR)

0.4%

0.8%

These figures provide a sense of the future state of the economy. US leading indicator is expected to decline to a 2-month low.

15:00

USD

Kansas City Fed Manufacturing Activity (MAY)

7

7

GMT

Currency

Upcoming Events & Speeches

10:00

EUR

ECB's Luis Linde Speaks on Euro Economy

20:00

USD

Fed's John Williams Speaks on U.S. Economy

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.8967

2.0968

10.3637

7.7522

1.2514

Spot

6.5914

5.4445

5.9346

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3796

1.6904

102.26

0.8983

1.0936

0.9377

0.8689

140.38

1312.53

Res 2

1.3774

1.6881

102.08

0.8968

1.0921

0.9359

0.8671

140.09

1307.71

Res 1

1.3753

1.6858

101.91

0.8952

1.0906

0.9341

0.8652

139.81

1302.89

Spot

1.3711

1.6812

101.55

0.8921

1.0876

0.9305

0.8615

139.23

1293.26

Supp 1

1.3669

1.6766

101.19

0.8890

1.0846

0.9269

0.8578

138.65

1283.63

Supp 2

1.3648

1.6743

101.02

0.8874

1.0831

0.9251

0.8559

138.37

1278.81

Supp 3

1.3626

1.6720

100.84

0.8859

1.0816

0.9233

0.8541

138.08

1273.99

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.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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