Dollar Closes at a Two Month Low as Market Expects Stimulus

DailyFX

  • Dollar Closes at a Two Month Low as Market Expects Stimulus
  • Euro: Stakes are High after ECB’s Draghi Leverages Hope
  • British Pound Looks for a Tempered Euro Crisis, Weighs BoE Action
  • Australian Dollar at Four Month High as Stimulus Wins Carry Appetite
  • Japanese Yen Sees Structural Issues in CPI, Temporary Relief in Draghi
  • Canadian Dollar’s Buffered Risk Exposure Would Curb Stimulus Reaction
  • Gold Slow to Given in to Fed and ECB Stimulus Hopes

Dollar Closes at a Two Month Low as Market Expects Stimulus

With the markets cheering the possibility of more external support by the ECB and Fed next week, risk appetite was on the rise while the safe haven dollar was deserted. Positioned at the extreme end of the risk spectrum, the greenback was throttled by the 4.4 percent recovery by the Dow and 4.1 percent rebound for the S&P 500 this past week (both closed at two-and-a-half month highs). With the immediate need for safety sated, we have seen the Dow Jones FXCM Dollar Index clear nearly two months of congestion and close at lows not seen since May 11. The expected outcomes were made for the majors. The investment currencies (the Australian, New Zealand and Canadian dollars) rallied over 2 percent against the benchmark or more. However, it was the EURUSD’s recovery from a two-year low to close back above the 1.2300 that truly reflects the fundamental shift over the past week and measures the consequences of what lies ahead.

Combing the newswires through the end of this past week, it isn’t difficult to discern that the market’s drive was built upon speculation rather than true fundamentals. The economic docket’s top offering was the first reading of 2Q US GDP. The 1.5 percent annualized reading was slightly better than the consensus, but it was still on a definable cooling pace. Besides not doing the world’s largest economy any favors, the growth reading further didn’t hit the lower threshold necessary to offer a standalone reason for the Fed to offer additional stimulus next week.

Moving into the new trading week, the benchmark for a genuine bull market run to last through August has been set high. The surge through the final 48 hours of the past week was founded on explicit expectations for the ECB and/or the Fed to provide additional relief to the strained financial and funding systems at their respective policy meetings. The FOMC will announce its intentions on Wednesday, but they expanded their effort at the last meeting (Operation Twist extension) and have voiced concern that further support would offer diminishing returns. For once, the market’s demands of the ECB are likely higher than its US counterpart. President Draghi set expectations exceptionally high for tangible support (more on that below). And of course, we shouldn’t forget Friday’s NFPs - though central bank gravity will set market orbits.

Euro: Stakes are High after ECB’s Draghi Leverages Hope

Through the past week, the Euro managed to advance against all of its major counterparts – safe haven and high-yield currency alike. A climb by the EURUSD or EURJPY could be attributed to general sentiment and nothing more, but the wide-spread performance points to an inherent fundamental strength from the shared currency. The source of that vigor was optimism was hard to miss in the financial headlines. The euro’s run is unmistakably the result of promises (whether explicit or not) made by ECB President Draghi. The central bankers’ vow to do what was necessary to support the euro on Thursday was characteristically vague. Yet, suggestions made Friday that Draghi was contemplating reactivation of the ECB’s bond purchase program (SMP), further rate cuts, another LTRO program and offering support for the ESM to obtain a banking license read like a fulfilled investor’s wish list. Even under the most optimistic conditions, he will not be able to entertain all of these options – though the market’s current bearing and pace likely reflect it. Each of these suggestions can be picked apart, but it is the bond purchases program that is likely most sought after and contentious. If the central bank doesn’t provide Thursday, this will just amplify a tumble.

British Pound Looks for a Tempered Euro Crisis, Weighs BoE Action

The sterling is happy to rise in the wake of its larger counterpart. With the market willing to believe that the Euro crisis will ease with efforts of the ECB, one of the greatest threats to UK market stability is put on hold. That said, curbing Euro-area risks offers the sterling fundamental relief but not a genuine bid. Looking for its own guidance next week, we have the Bank of England’s August meeting on tap Thursday. Though there will be a lot of immediate speculation dedicated to the ECB headlines, it is worth remember that the BoE was contemplating a rate cut early in July.

Australian Dollar at Four Month High as Stimulus Wins Carry Appetite

Lifted by the saccharin taste of risk appetite, the Australian dollar has managed a 2.5 percent rally against the greenback and 2.9 percent surge against the Japanese yen since Tuesday’s close. There is no mistaking the source of this strength; and given the RBA’s outlook for monetary policy is still pointing towards further cuts through the coming months, the appetite for risk has to be higher to compensate. Otherwise, disappointment from these elevated levels could prove explosive. There are a few docket items next week, but focus on equities’ performance.

Japanese Yen Sees Structural Issues in CPI, Temporary Relief in Draghi

Japanese Finance Minister Azumi hailed ECB President Draghi’s dedication to the euro Friday. He would, as the potential for more stimulus for the world’s most at-risk region market naturally takes the pressure off of safe haven s like the Japanese yen. Just as with the Euro zone situation, Japanese officials only have intervention and manipulation to fall back on. Their structural problems are simply not being answered. As evidence, the effort to double sales tax and work down deficits is highly unstable and inflation has once again turned negative.

Canadian Dollar’s Buffered Risk Exposure Would Curb Stimulus Reaction

It is a considerable boon to the Canadian dollar during unfavorable risk appetite scenarios that the country does not suffer from the same financial and economic risks that most of its major counterparts do. That said, when there is a speculative run (like the one we saw through the second half of last week), the loonie will be similarly deadened as their isn’t as much recovery to be made nor yield to target. Nevertheless, we must keep a steady eye on risk trends when playing this currency. Top docket offering will be the May GDP reading.

Gold Slow to Given in to Fed and ECB Stimulus Hopes

A four-day advance and convincing congestion breakout for gold would normally be considered a remarkable setup for a breakout. Instead, we found momentum flagging in the move and implied volatility dropping as resistance was cleared. This metal is very much an alternative to fiat assets, so their devaluation through stimulus would usually drive it higher. What does it say of ECB and Fed speculation that gold is hesitating?

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

22:45

NZD

Building Permits (MoM)

-7.1%

May was the first consecutive month of decline since March 2011.

23:01

GBP

Hometrack Housing Survey (MoM)

0.0%

Declining (YoY) since October 2010.

23:01

GBP

Hometrack Housing Survey (YoY)

-0.5%

23:15

JPY

Nomura/JMMA Manufacturing Purchasing Manager Index

49.9

Index has significantly moderated around 50.

23:50

JPY

Industrial Production (MoM)

-3.4%

Production has slowed since the start of Q2.

23:50

JPY

Industrial Production (YoY)

6.0%

04:00

JPY

Vehicle Production (YoY)

59.5%

May figure eased dramatically off of the April spike.

7:00

EUR

Spain GDP (2Q P)

-1.0%

-0.4%

A critical health update for a critical Euro Zone member.

08:30

GBP

Net Consumer Credit

0.7B

Consumer confidence has risen slightly since Jan 1st.

08:30

GBP

Net Lending Sec. on Dwellings

0.6B

Mortgage approvals are down for the first half of the year.

08:30

GBP

Mortgage Approvals

51.1K

08:30

GBP

M4 Money Supply (MoM)

-0.1%

M4 near a 10 year low. M4 read as a gauge for effectiveness in funding for lending program

08:30

GBP

M4 Money Supply (YoY)

-4.1%

09:00

EUR

Euro-Zone Business Climate Indicator

-1.09

-0.94

Four straight months of declines.

09:00

EUR

Euro-Zone Consumer Confidence

-21.6

-21.6

Euro-Zone retail sales in negative territory for most of the year.

09:00

EUR

Euro-Zone Economic Confidence

88.9

89.9

Weighted composite.

09:00

EUR

Euro-Zone Industrial Confidence

-14.0

-12.7

The lower exchange makes Europe more competitive for manufactured goods, but buffered by weaker demand.

09:00

EUR

Euro-Zone Services Confidence

-8.0

-7.4

Indicator of the effect the euro-zone crisis has on the middle-class.

10:00

GBP

CBI Reported Sales

42

At levels not seen since 2010.

14:30

USD

Dallas Fed Manufacturing Activity

3.0

5.8

Texas manufacturing outlook survey saw declinines in finished goods inventories.

GMT

Currency

Upcoming Events & Speeches

9:00

EUR

Italy to Sell 3, 5, 10-year Bonds

13:30

EUR

ECB to Announce Bond Purchases in SMP

USD

US Treasury Issues Quarterly Borrowing Estimates

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

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

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

Spot

13.2393

1.8120

8.1570

7.7573

1.2475

Spot

6.8665

6.0376

6.0451

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

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.2457

1.5882

79.09

0.9859

1.0109

1.0599

0.8192

97.95

125.00

Resist. 2

1.2424

1.5848

78.93

0.9831

1.0090

1.0570

0.8168

97.63

124.64

Resist. 1

1.2390

1.5815

78.78

0.9804

1.0071

1.0541

0.8145

97.31

124.28

Spot

1.2322

1.5748

78.46

0.9749

1.0033

1.0483

0.8097

96.67

123.57

Support 1

1.2254

1.5681

78.14

0.9694

0.9995

1.0425

0.8049

96.03

122.85

Support 2

1.2220

1.5648

77.99

0.9667

0.9976

1.0396

0.8026

95.71

122.49

Support 3

1.2187

1.5614

77.83

0.9639

0.9957

1.0367

0.8002

95.39

122.14

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

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