Dollar Wins its Biggest Rally Against Euro in Nearly Three Months

DailyFX

  • Dollar Wins its Biggest Rally Against Euro in Nearly Three Months
  • Euro Faces Support Against Dollar, Yen, Aussie Dollar as Outlook Fades
  • British Pound Shows Little Interest in Strongest GDP Estimate in Two Years
  • Australian Dollar: Long Term Bond Auction to Measure Confidence
  • Swiss Franc Finding a More Permanent Bearish Push as Banks Charge for Deposits
  • Oil Soars 2.8 Percent – Speculative Swing or Serious Trend?
  • Gold Posts only Second Three-Day Decline Since Early August

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Dollar Wins its Biggest Rally Against Euro in Nearly Three Months

After a highly contested NFP report, global downgrade on growth from the IMF and serious upgrade of uncertainty surrounding the world’s most prolific financial threat (the Euro-area debt crisis), the safe haven dollar posted little progress. Yet, though the otherwise, fundamentally-quiet session we just closed; EURUSD managed its biggest drop (0.64 percent) since July 20. Fundamentals don’t always follow the rule of logic because its direction and pace are dictated by assumptions and expectations of a mass of investors – which is anything but logical. However, there are precepts to this performance that help us acquire a handle on this recent move and whether it can prove consistent moving forward.

Though we didn’t see extreme reaction to the immediate release of questionable-to-negative event risk over the past few active trading days, the general influence is unmistakable. The lack of reaction on the risk front to the sharp drop in the jobless rate – and stability from the US dollar – on Friday reflects a market that is discounting the influence of ‘positive’ developments. A curb on the positive and leverage to the negative is the fundamental definition of a bearish market. In contrast to the absence of response to ‘risk on’, the event risk this week hasn’t immediately hit a nerve for the deeper themes that define market direction and activity levels. However, the downgrade in global growth forecasts from the IMF yesterday is joined by the more bearish read from the same outfit’s financial stability report this morning as well as concern surrounding the 3Q earnings season performance - Alcoa posted a modest better-than-expected performance after hours, but the real wave starts Friday.

What makes these markets so loaded with both tension and potential is the combination of a growing respect for dislocated fundamentals (greater appreciation for risk aversion) and the proximity of serious technical levels. Looking at the Dow Jones FXCM Dollar Index (ticker = USDollar), a confluence of Fibs and channel top at 9940 is directly above. From the crosses, EURUSD faces 1.2800, AUDUSD is staring down 1.0150 and EURJPY is close to reversal near 100.75. On the opposite side of that spectrum, the S&P 500 is close to turning the tide near 1425 after failing to generate progress on a break to fresh four-year highs. When technicals and fundamentals align, probabilities are much higher.

Euro Faces Support Against Dollar, Yen, Aussie Dollar as Outlook Fades

The euro posted another market-wide drop Tuesday (this time with the exception of EURCHF, which was again influenced by an unexpected factor – read more about that below). Euro-area headlines were far more reserved this past session than they have been over the past week. That said, all we need is general sentiment to sour for the standing concerns over the region to weigh the currency lower. Amongst the noteworthy developments over the past 24 hours, the most concerning was the troubling assessment made by the IMF. The group lowered its 2013 growth forecast sharply (0.7 to 0.2 percent), warned the ECB may have to cut rates further to offset deflation concerns and stated that the Euro-area crisis is the greatest threat to global stability. Not helping the shared currency, ECB President Draghi stated in the Eurozone Parliament that the currency faces risk from financial stability and there was no alternative to austerity.

British Pound Shows Little Interest in Strongest GDP Estimate in Two Years

There was a substantial round of data on the UK docket through the past session, and the conflicting readings may have helped to curb the sterling’s decline. On the bearish side of the docket, the trade balance for August ballooned to 9.85 billion pounds – dangerously close to the record. So much for the economy exporting its way to recovery. The 0.5 percent drop in factory activity for the same month was a little more ambiguous given it followed the biggest jump in 25 years. That said the NIESR GDP estimate for September was more direct in its support with a 0.8 percent reading – the strongest in over two years. The markets are paying closer attention to the fundamental mix, but watch risk trends.

Australian Dollar: Long Term Bond Auction to Measure Confidence

The interest rate outlook for RBA has stabilized with the market pricing in an approximate 80 percent chance of a rate cut at the next meeting and 90 bps of cumulative cuts over the coming 12 months. For risk trends, there has been a notable easing from exceptional highs, but a definitive break lower has yet to present itself. A definitive move on underlying sentiment carries the greatest potential from here (to decide a break or reversal at 1.0150 for AUDUSD and 80 for AUDJPY), but we should also take note of an announced bond auction coming up. A 16.5 year debt would be the longest maturity in over 20 years. We can measure demand to see just how hungry the market is for Aussie assets.

Swiss Franc Finding a More Permanent Bearish Push as Banks Charge for Deposits

Under most conditions, the franc is either an interchangeable representative to the euro amongst the crosses and a direct safe haven when paired against the euro itself. For the EURCHF exchange rate this position acts like a permanent magnet to draw the pair back towards 1.2000. However, we may be seeing a more dynamic change in the franc’s safe haven appeal starting to develop. After State Street announced its intentions to charge for deposits made in Swiss francs (to account for the country’s negative rates), we heard that RBC would do the same. While a fixed exchange rate won’t discourage investors seeking safety, having to pay for deposits is far more effective. Is the SNB off the hook?

Oil Soars 2.8 Percent – Speculative Swing or Serious Trend?

When we look at the fundamental developments for oil on the day, the 2.8 percent rally seems highly unusual. Not only did the IMF downgrade global growth forecasts, but we also learned that Iraq’s exports have grown (with an aim to double by 2020) and inventory figures are expected to increase once again in upcoming figures. If this was a speculatively-derived move only, it is very likely to reverse without tangible support.

Gold Posts only Second Three-Day Decline Since Early August

A strong dollar and an imbalance between financial forecast and stimulus expectations (the ECB and Fed aren’t threatening further support) has helped push gold to its lowest close in two weeks Tuesday. With that decline, the precious metal has not dropped for three consecutive days – the second such series since the move through August 2. The pressure for a serious reversal lingers in the air – just as the dollar looks higher.

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

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

6:00

JPY

Machine Tool Orders (YoY) (SEP P)

-

-2.7%

Decline may continue

11:00

USD

MBA Mortgage Applications (OCT 5)

-

16.6%

Weekly number could see sustained growth on start of purchases

14:00

USD

JOLTs Job Openings (AUG)

-

3664

Rise expected on NFPs

14:00

USD

Wholesale Inventories (AUG)

0.4%

0.7%

Inventory accumulation still growing, though expected slower

21:45

NZD

Food Prices (MoM) (SEP)

-

0.1%

Calming inflation may relieve pressure on RBNZ hike

22:30

NZD

Business NZ PMI (SEP)

-

47.2

Declining on weaker AU, CN

23:50

JPY

Machine Orders (MoM) (AUG)

-2.3%

4.6%

Inventory spending expected to decline as August particularly bad month

23:50

JPY

Machine Orders (YoY) (AUG)

-4.6%

1.7%

23:50

JPY

Bank Lending incl Trusts (YoY) (SEP)

-

0.9%

September lending may grow on new BoJ easing, though long term effects questionable

23:50

JPY

Bank Lending Banks ex-Trust (SEP)

-

1.1%

GMT

Currency

Upcoming Events & Speeches

-:-

ALL

IMF Releases Parts of Financial Stability Report

18:00

USD

Fed Releases Beige Book Economic Survey

18:45

USD

Fed's Kocherlakota Speaks to Businesses in Montana

20:45

USD

Dallas Fed's Richard Fisher Speaks at Cato Conference

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visitTechnical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit ourPivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USDMXN

USDTRY

USDZAR

USDHKD

USDSGD

Currency

USDSEK

USDDKK

USDNOK

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

9.1900

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

12.8786

1.8232

8.7453

7.7517

1.2307

Spot

6.6991

5.7906

5.7332

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.5575

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

1.2997

1.6107

78.78

0.9492

0.9852

1.0300

0.8255

101.86

126.29

Resist. 2

1.2968

1.6080

78.64

0.9471

0.9834

1.0276

0.8234

101.59

126.01

Resist. 1

1.2939

1.6053

78.51

0.9450

0.9817

1.0252

0.8214

101.32

125.73

Spot

1.2880

1.5999

78.23

0.9407

0.9783

1.0204

0.8174

100.77

125.17

Support 1

1.2821

1.5945

77.95

0.9364

0.9749

1.0156

0.8134

100.22

124.60

Support 2

1.2792

1.5918

77.82

0.9343

0.9732

1.0132

0.8114

99.95

124.32

Support 3

1.2763

1.5891

77.68

0.9322

0.9714

1.0108

0.8093

99.68

124.04

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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