|Index||Last||High||Low||Daily Change (%)||Daily Range (% of ATR)|
|DJ-FXCM Dollar Index||10013.15||10037.69||10007.84||-0.10||56.01%|
The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.10 percent lower from the open after moving 56 percent of its average true range, but we may see the greenback track higher ahead of the Federal Open Market Committee interest rate decision as the developments coming out of the world’s largest economy dampens the scope for more monetary support. As price action breaks the downward trend carried over from the previous week, we should see the rebound from 10,000 gather pace over the next 24-hours of trading, but we will be keeping a close eye on the 30-minute relative strength index as it continues to find interim resistance around the 60 figure. In turn, the dollar may hold steady going into the rate decision, and the fresh batch of central bank rhetoric is likely to heavily impact the greenback as market participants weigh the prospects for future policy.
As the USDOLLAR holds above the 10,000 figure and maintains the ascending channel from earlier this year, we may see the greenback strengthen further in the coming days, but the bullish momentum could be tapering off as the relative strength index threatens the upward trend from the beginning of 2012. Although the FOMC keeps the door open to expand its balance sheet further, we should see the central bank move away from quantitative easing and soften its dovish tone for monetary policy as the committee sees the recovery gradually gathering pace over the coming months. In turn, a more upbeat Fed should pave the way for a meaningful correction in the index, and the ongoing shift in the policy outlook may continue to foster a bullish outlook for the USD as market participants scale back bets for QE3.
The greenback weakened against three of the four components, led by a 44 percent rally in the Euro, while the Australian dollar climbed 0.15 amid the rise in market sentiment. Indeed, currency traders appear to be scaling back their bearish outlook for the aussie as Credit Suisse overnight index swaps now show expectations for a 75bp worth of rate cuts over the next 12-months, but the short-term rally in the AUDUSD appears to be losing steam as the relative strength index remains capped by the 68 figure. As the aussie-dollar maintains the downward trend from the 2011 high (1.1079), the pair could be carving out a lower top going into August, and we may see a sharp correction in the exchange rate should the FOMC interest rate decision sap risk-taking behavior.
Trading the News: Federal Open Market Committee Rate Decision
Time of release: 08/01/2012 18:15 GMT, 14:15 EDT
Primary Pair Impact: EURUSD
DailyFX Forecast: 0.25%
Why Is This Event Important:
The Federal Open Market Committee is widely expected to maintain its current policy in August, but the fresh batch of central bank rhetoric may shake up the foreign exchange market as currency traders weigh the outlook for monetary policy. As the FOMC continues to carry out ‘Operation Twist,’ it seems as though the committee will maintain its current policy throughout the remainder of the year, and we may see Chairman Ben Bernanke continue to soften his dovish tone for monetary policy as the economic recovery gradually gathers pace. In turn, we may see the Fed continue to move away from quantitative easing and the central bank may start to discuss a tentative exit strategy as the economy gets on a more sustainable path.
Recent Economic Developments
|Personal Consumption Expenditure Core (YoY) (JUN)||1.8%||1.8%|
|Personal Income (JUN)||0.4%||0.5%|
|Gross Domestic Product (Annualized) (QoQ) (2Q A)||1.4%||1.5%|
|Advance Retail Sales (JUN)||0.2%||-0.5%|
|Change in Non-Farm Payrolls (MAR)||100K||80K|
|ISM Manufacturing (JUN)||52.0||49.7|
As the stickiness in underlying price growth paired with the uptick in personal incomes raises the threat for inflation, we should see the FOMC talk down speculation for additional monetary support, and the committee may sound more hawkish this time around as the central bank sees a muted risk for a double-dip recession. However, the Fed may strike a cautious outlook for the region amid the ongoing weakness in the labor market along with the slowdown in private sector consumption, and the central bank may keep the door open to expand its balance sheet further in an effort to encourage a stronger recovery.
Potential Price Targets For The Rate Decision
The relief rally in the EURUSD appears to be tapering off as the pair remains capped by the 50-Day SMA (1.2443), and the euro-dollar looks poised to weaken further as the relative strength index maintains the downward trend from earlier this year. As the euro-dollar appears to be carving out a lower top ahead of the rate decision, a less dovish Fed may trigger a sharp reversal in the exchange rate, and the pair may continue to give back the rebound from 2010 (1.1875) should the central bank talk down speculation for additional monetary support.
Trading the given event risk may not be as clear cut as some of our previous trades as the Fed sticks to its current policy, but the statement accompanying the rate decision could set the stage for a long U.S. dollar as should the central bank curb bets for QE3. Therefore, if the FOMC softens its dovish tone for monetary policy and turns increasingly upbeat towards the economy, we will need to see a red, five-minute candle following the announcement to establish a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in order to lock-in our profits.
In contrast, the Fed may sound more cautious this time around amid the ongoing turmoil in the world economy, and the central bank may keep the door open to expand its balance sheet further in an effort to stem the downside risks for the region. As a result, if the FOMC shows a greater willingness to push through another large-scale asset purchase program, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in the opposite direction.
Impact that the FOMC Interest Rate Decision has had on USD during the last release
|Period||Data Released||Estimate||Actual||Pips Change
(1 Hour post event )
(End of Day post event)
|JUN 2012||6/20/2012 16:30 GMT||0.25%||0.25%||+13||+16|
June 2012 Federal Open Market Committee Interest Rate Decision
Indeed, the FOMC kept the benchmark interest rate at 0.25% in June, but announced that the committee will extend ‘Operation Twist’ until the end of 2012 in an effort to stem the ongoing slack within the real economy. The move dragged on the greenback, with the EURUSD quickly climbing back above the 1.2700 figure, and the reserve currency struggled to hold its ground throughout the day as the pair closed at 1.2704.
Today’s European session has had little chatter but a lot of negative economic indicators. EURUSD has swung above and below 1.2300 since the initial rally following European Central Bank President Draghi’s pro-Euro comments on Thursday. Following those comments, there have been talks of a plan for the ECB and EFSF to buy Spanish and Italian debt in primary and secondary markets, in an attempt to lower borrowing costs for both struggling economies. However, this plan has yet to be officially confirmed, likely hinging on German approval of the bond buying program.
Meanwhile, Euro-zone unemployment reached an all time high at 11.2% and inflation remained lower, both are likely results of the debt crisis’ pressure on the European economy. German retail sales also disappointed investors by coming in lower for a third straight month, and German unemployment rose as expected.
The Euro has floated up and down in today’s session, currently only trading slightly higher against the US Dollar. Support could be provided by 1.2234, the 50% expansion from May’s high to June’s low, while resistance might be found at the psychological 1.2300 line.
The European Central Bank will meet on Thursday to decide the interest rate for August, and the bank is more likely to take action after today’s data. The 0.25% rate cut in July was not seen by currency investors as significant enough to boost the Euro, and the single currency sold off against the US dollar following last month’s rate decision.
EURUSD 15-minute: July 31, 2012
THE TAKEAWAY: Euro-zone PMI for manufacturing revised to new 3-year low at 44.0 -> Contracting manufacturing index places focus on ECB meeting -> Euro trading steady
Euro-zone manufacturing activity declined even more than initially estimated according to the final release of July’s Purchasing Managers’ Index. The PMI for July was confirmed at 44.0, down from an initial estimate of 44.0, and further lowering the lowest manufacturing index in 37-months. Any PMI below 50.0 indicates a contraction in activity.
The decline in July’s PMI was a sum of faster contraction in output, new orders and employment in the manufacturing industry. Manufacturing activity has been contracting for the past 12 months according to Markit. Only Ireland managed to show an improved PMI for July, rising to a 15-month high at 53.9.
Germany’s PMI for manufacturing was the worst since April 2009, released at 43.0, lower than an initial estimate of 43.3. Reduced production volumes have been recorded in Germany in each of the past four months, driven by a decline in the investment goods sector, according to Markit. July’s survey showed thirteen straight months of contraction in incoming new business for German factories.
Markit Chief Economist Chris Williamson said, ‘manufacturing looks to be on course to act as a major drag on economic growth in the third quarter, as the Euro-zone faces a deepening slide back into recession.’
The decline in manufacturing activity is a result of the European economy struggling with its debt crisis. Euro investors are slightly more optimistic since ECB President Draghi’s comments last week, but they should be looking towards tomorrow’s meeting for action to back up Draghi’s words, like the backing of a banking license for the ESM.
There was no significant reaction in Euro trading to the worse than estimated PMI’s, as traders seem focused on the possible outcomes of the FOMC meeting set for this afternoon and the ECB meeting tomorrow. EURUSD is currently trading around 1.2300, and support could come in around the 1.2300 psychological line, and resistance could set in at 1.2333, by an upward trend-line spanning nearly a decade.
Fundamental Forecast for US Dollar: Bullish
- Fed Chairman Bernanke refuses to deliver on QE3 hopes at Testimony
- IMF maintains US 2012 Growth forecast 2.0 percent, downgrades others
- US Dollar at defining technical levels against its benchmarks
The dollar took a beating this past week, but ended Friday with a breath of respite. Before Friday’s 0.46 percent rally for the Dow Jones FXCM Dollar Index (ticker = USDollar) – notably, the biggest advance since the massive June 21 surge – the benchmark carved out a five day decline. That was the most consistent decline for the index since early April and by certain measures the most oppressive slide since November. The last-minute reversal was a welcome sign for greenback, but that move alone does not ensure a trend. To ensure a meaningful trend (be it bullish or bearish), we need the fundamental drive to incite action and maintain conviction.
There are a few different potential fundamental catalysts that can offer the greenback guidance over the coming week – but they will vary for influence for short-term volatility and contributing to a lasting momentum. The most immediate consideration for a catalyst at the start of next week is the fate of EURUSD. Given its status as the world’s most liquid pair, the progress that this particular rate makes can easily spill over to the rest of the dollar-based majors. That sets up a tense open to the upcoming trading week as the pair closed Friday at its lowest level in two years and finds itself on the threshold of igniting another, aggressive selling leg. You don’t have to be a technical trader to appreciate the midpoint of the EURUSD’s historical range at 1.2135 carries substantial weight.
Yet, the euro won’t simply cave because of its proximity to a meaningful level. Renewed concerns over the region’s financial trouble held the shared currency back amidst a rebound in risk last week and it sparked the intense move decline through Friday. There are plenty of angels to the Euro-area crisis; but to move us to the next phase, we need to see an escalation and possibly a clearer threat of a global pandemic. Last week, the vote to finalize Spain’s rescue drew little relief as the market instead focused on the shortfalls in this effort, the lack of clarity on bigger agenda items (using the ESM to directly rescue ailing banks and governments) and reports of fresh sovereign-level issues (a request for aid from Valencia). Sentiment surrounding the Euro-crisis is very much the product of expectations and the market’s focus. If investors are looking for a reason to sell the euro (and thereby buy the dollar), they will find it.
Another critical aspect of the Euro crisis focus is its potential to fan general risk trends. As the preferred safe haven currency, the choppy but persistent updraft in US equities (my preferred measure of risk appetite) since the low set in the beginning of June works against the dollar. The 2Q earnings session has not acted as the spark for either a return of confidence or its collapse as investors are monitoring both the EPS surprises (bullish) as well as the trends in revenue growth (bearish). Given the current status of the Euro Zone’s financial tension, diminished expectations for global growth and historically low rates of return; it wouldn’t take much to rouse fear.
In measuring ‘risk’, there are two considerations to keep in mind. An initial shock could help drive EURUSD to its critical break and turn the passive drift towards risk-favored assets; but to build a bullish trend for the greenback, we need a consistent risk aversion push. This is the kind of move that starts to meaningfully reverse the AUDUSD’s 850-pip rally these past few months. This kind of move would be visible across the markets and leverage correlations that are otherwise the reflective of investor sentiment itself. With implied volatility measures (measures of expected volatility and risk via options insurance premiums) for the equities and FX markets either at or near lows not seen since 2007, it is clear that the markets are dangerously oblivious to the tangible risks that financial systems and economies face.
A possible complication to a near-term swell in fear is the market’s bad habit of waiting for the next fundamental event rather than adapting to what’s already transpired. Friday, we have the US 2Q GDP reading which has a low probability of delivering a bullish surprise; but market participants have sat on their hands for less. Far more influential is the near omnipotent hope for QE3. The Fed and Bernanke have offered no joy on this front, and we won’t likely revisit the option until late August (the Jackson Hole Symposium). – JK
- Dollar Ends the Week with Relief, Risk Trends and US GDP Ahead
- Euro Takes a Dive Friday as Crisis Fears Surge Despite Spain Agreement
- British Pound May Unmoor from its Fundamental Drift with 2Q GDP Numbers
- New Zealand Dollar: How will the Market Respond to the RBNZ Decision?
- Australian Dollar Tempers its Anti-Risk Loss, CPI Data May Change That
- Swiss Franc: A Resurgence in Euro Selling Raises Pressure on SNB
- Gold’s Tight Range and Cheap Risk Premium Belie Fundamental Tension
Dollar Ends the Week with Relief, Risk Trends and US GDP Ahead
Friday brought a welcome sight for the beleaguered greenback: risk aversion and a particularly significant euro sell off. The fundamental boost offered the Dow Jones FXCM Dollar Index a 0.5 percent jump to break its five-day, 155-pip decline. However, from here we cannot discern temporary correction from genuine trend reversal. From the Dollar Index and the S&P 500 – two benchmarks from the extreme ends of the sentiment spectrum – the move has retraced a fraction of the preceding week’s and month’s progress. Setting probabilities on these standards alone would leave us with a rather low probability scenario for seeing fresh, multi-month highs for the dollar and risk aversion in the near future. On the other hand, we can find a volatile spark in the EURUSD’s precarious position. At the center of the financial market’s ire Friday, the euro tumbled to a two-year low against its primary counterpart and ended the week once again on the absolute verge of overtaking the midpoint (or as technical traders call it: the 50 percent Fib retracement) of its historical range. Though the dollar has a significant climb before it is forging 22-month highs again, an influential break like a EURUSD collapse would represent a big step in delivering us there.
With the world’s most liquid pair threatening a seismic shift, there is an immediate risk over the opening 24-48 hours of the new trading week that sentiment trends are caught in the undertow to further leverage the dollar’s fundamental position. Fear that efforts to curb the euro crisis are failing (and that the situation is in fact intensifying and spreading) would be a persuasive spark with implied volatility for the FX market at five year lows while structural fundamental forecasts have deteriorated. Getting the ball rolling for risk aversion is the first step – keeping it moving is the next. That said, momentum will be easier to sustain than ignite. Over the past two months, a consistent trend has been difficult to sustain as there have been too many scheduled events that catered to investors’ expectations and hopes for additional support from policy authorities. With Fed Chairman Bernanke reinforcing the bank’s reluctance to QE3 and EZ finance ministers showing the extent of their will to stabilize their region, there is doubt that they can even provide relief at the (distant) next round of decision meetings. In the meantime, the US 2Q GDP reading Friday can play dampener and catalyst. Depending on how hopeful the masses are, the report can be treated as a reason to hold back from a major move. At the same time, depending on expectations and the level of surprise; such an all-encompassing indicator can redefine sentiment.
Euro Takes a Dive Friday as Crisis Fears Surge Despite Spain Agreement
The Euro was the worst performing major currency Friday…on a day that officials supposedly made progress in the crisis fight by issuing approval for Spain’s bank bailout. The disconnect was in the market’s expectations leading into the event and the unexpected, supplementary headlines for the session. For the Euro area Finance Minister’s meeting on Spain, the country’s rescue was already supposedly approved. Therefore, another vote that confirmed the support without further details to total amount and time frame offered no progress. Worse than that, it seems now that banks could share losses and investors may be subordinated. Not to miss an opportunity to truly undermine the currency, we also learned that credit rating agency Egan Jones had downgraded Spain to CCC+ and that one of its largest regional governments (Valencia) would seek financial assistance. A full (rather than just a bank) bailout is looking inevitable. And so, EURUSD peers over the ledge.
British Pound May Unmoor from its Fundamental Drift with 2Q GDP Numbers
There are two ticket, economic indicators scheduled for release this coming week; and the UK 2Q GDP reading is one of them. The sterling has a unique position amongst the majors where it hasn’t defined its own bearing. It is seen as a gateway for the spread of the EU crisis that really hasn’t jumped the firewall yet, its moderate yield may soon be cut and the ambitious fiscal retrenchment effort is starting to show stress on the economy. In other words, the sterling is in fundamental, transitional phase. That drift, however, can be broken by a significant data surprise.
New Zealand Dollar: How will the Market Respond to the RBNZ Decision?
Comparisons will always be drawn to its Australian counterpart when we contemplate the New Zealand dollar. Yet, there is a very substantial difference between the two in the aspect that matters most for the high yielders: rates. The Aussie dollar has climbed against the kiwi despite the fact that New Zealand bond yields and deposit rates (real, investable yields) stand at a substantial premium to Australia’s. Perhaps the market will be reminded of that fact this fact should the RBNZ hold rates and keep a neutral tone. Perhaps it will take risk aversion to balance the field.
Australian Dollar Tempers its Anti-Risk Loss, CPI Data May Change That
With global equities awash in a sea of red, the risk-sensitive Australian dollar would certainly suffer for the unfavorable turn. That said, compared to most capital market benchmarks, the high-yield currency managed to limit its losses. There is still some moderate level of recovery momentum for the currency as the previously, aggressive outlook for rate cuts eases; but that well is soon to run dry. With 2Q CPI data expected to drop below target range this week, neutral may soon turn dovish again. Risk trends and fresh central bank interest should also be considered.
Swiss Franc: A Resurgence in Euro Selling Raises Pressure on SNB
Should confidence in the Euro-area crisis fight fall through, it is easy to connect the consequences to a momentous break for EURUSD and possibly a spill over to the general risk environment. Yet, it is important to further connect the dots to Europe’s favored safe haven link – EURCHF. If the world’s most liquid pair instigates a new decline below 1.2135, the speculative and fundamental pressure will no doubt spill over to pressure on the SNB’s 1.2000 EURCHF floor. They can continue to fight, but policy changes are more likely to happen under duress.
Gold’s Tight Range and Cheap Risk Premium Belie Fundamental Tension
The already tight range on gold continues to constrict, and traders seem to see no problem with it – at least they aren’t pricing it into options. The CBOE’s gold volatility index slipped to a new two-month low this past Friday, suggesting risk premiums are growing cheaper. Should broader market activity pick up through risk trends, the diminished potential for the Fed to deliver up QE3 can pose a serious problem for gold.
Next 24 Hours
|JPY||JPY Small Business Confidence||46.2||A level of 50 is historically high.|
|01:30||AUD||AUD Producer Price Index (QoQ)||0.3%||-0.3%||Prices have been declining in N.Z. and the rest of the world.|
|01:30||AUD||AUD Producer Price Index (YoY)||1.0%||1.4%|
|05:00||JPY||JPY Supermarket Sales (YoY)||-1.0%||Declining since February.|
|07:00||CHF||CHF Money Supply M3 (YoY)||6.2%||Seven month declining trend.|
|07:00||CHF||CHF Real Estate Index Family Homes||410.4||In a general up trend since 2002.|
|12:30||USD||USD Chicago Fed Nat Activity Index||-0.45||Declines in May were lead by declines in production-related indicators.|
|14:00||EUR||EUR Euro-Zone Consumer Confidence (JUL A)||-19.8||Interesting the effect of the EU Summit had on consumer confidence.|
|02:30 (TUE)||CNY||CNY HSBC Flash Manufacturing PMI||48.2||Contraction could hurt N.Z. and Aussie exports.|
|GMT||Currency||Upcoming Events & Speeches|
|-:-||EUR||Portugal Issues Year-to-Date Budget Report|
|-:-||JPY||Cabinet Office Issues Monthly Economic Report|
|2:00 (TUE)||CNY||Conference Board Leading Economic Index (JUN)|
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 GMTSCANDIES CURRENCIES 18:00 GMT
|Resist 2||15.5900||2.0000||9.2080||7.8165||1.3650||Resist 2||7.5800||5.6625||6.1150|
|Resist 1||15.0000||1.9000||8.5800||7.8075||1.3250||Resist 1||6.5175||5.3100||5.7075|
|Support 1||12.5000||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
The dollar dropped for a second consecutive trading session Monday – the first back-to-back slide for the benchmark in a month. Yet, this safe haven’s decline didn’t seem to originate through a traditional surge in risk appetite. Benchmark equity indexes were flat and fundamental catalysts for a rise in sentiment were notably lacking. This deviation is likely to extend very far. That suggests that either the dollar’s tumble is ready to correct or risk trends themselves will play catch up. The docket has a few sparks to set this convergence in motion, but how much can we expect from such a fundamental merge?