Euro Breakouts Hard to Avoid with Upcoming ECB Rate Decision  

DailyFX

Talking Points:

  • Dollar Stabilizes but Not Because of Yellen or Risk Trends
  • Euro Breakouts Hard to Avoid with Upcoming ECB Rate Decision
  • Yen Crosses Capable of Starting the Risk Run?

Dollar Stabilizes but Not Because of Yellen or Risk Trends

Though the recovery effort wasn’t as substantial as the tumble that preceded it, the US dollar put in for a rebound Wednesday. The Dow Jones FXCM Dollar Index (ticker = USDollar) put in for its biggest advance in two weeks, and the benchmark currency rose against all of its major counterparts by an average of 0.28 percent. Yet, in this advance, the index barely budged from its 14-month range low, EURUSD held above 1.3900, GBPUSD remains in reach of 5-year highs, and USDJPY is technically still in breach of a long-term bullish trendline. This lack of conviction in price is a solid reflection of the fundamental circumstances that underlie the environment.

With the rebound from the past session, many would latch on to the idea that Fed Chair Janet Yellen’s testimony before the Joint Economic Committee was a catalyst for the recovery effort. In her comments, the central banker reinforced the FOMC’s general optimism for growth and the path towards the return to a tightening regime. Adding a new phrase for speculators to chew on, she specifically noted that QE3 should be fully wound-down by the Fall if they maintain their current pace. That is on the earlier side of the range expected. How much would this really add to rate expectations and leverage a premium for the dollar though? Looking at shorter duration Treasuries – good barometers for the return to a hawkish regime – both the 2 and 5-year Treasury yields dropped.

So, what motivated the dollar this past session – and will subsequently guide it going forward unless something significant tips the market off its axis? Complacency. Short bursts of volatility will become more frequent as participation fades; but the moves will die well before developing into trends and retracements will follow close behind. Ahead, a wave of Fed speakers will test their influence over rate forecasts again.

Euro Breakouts Hard to Avoid with Upcoming ECB Rate Decision

EURUSD has a 250 range that it can traverse before the market starts to talk about trend development once again. EURJPY has less than 100 pips to cover before breaking out, while EURGBP is working with less than 50 pips. The Euro’s limited trading scope isn’t particularly remarkable given the general conditions of the FX and financial markets. However, those limitations turn into a dangerous liability when we face event risk that can generate volatility and event trend. That is the case with the upcoming ECB rate decision. The central bank has positioned itself into direct conflict with the market. Speculative appetite for higher yield has directed global capital into Eurozone periphery bonds while reserve diversification has raised the profile of the world’s second most liquid currency. These are motivated capital flows. When ECB President Draghi made the connection between a high Euro and inflation in charged commentary in March (13th) and April (24th), he set a psychological boundary around 1.4000. Yet, the warnings haven’t turned the market. If the ECB doesn’t escalate, it may very well break.

Yen Crosses Capable of Starting the Risk Run?

Though USDJPY’s bearish break Tuesday didn’t evolve into the lasting trend the technical pattern threatened it could, the hit was perceptible. In the upcoming session, if the ECB takes action; EURJPY may also find its way to a break. If EURJPY breaks, the Euro-Franc correlation is likely to pull CHFJPY into a similar move. This brings up the question: how much volume has to back individual yen moves before the currency itself is tipped into a new trend? There is considerable technical tension on the crosses and implied (expected) volatility reading for USDJPY is at record lows. The backdrop for a serious breakout is there. All that’s needed now is a catalyst – most likely, risk trends.

New Zealand Dollar: The Effectiveness of Exchange Rate Threats

RBNZ Governor Wheeler was not playing coy Wednesday morning when he said that the Kiwi dollar was overvalued and that further gains would lead him to reconsider his monetary policy bearings. The market seems to have taken him at his word as the local currency dropped between 0.7 and 0.9 percent against its primary counterparts. Yet, how much has this threat truly put off expectations for a steady pace of rate hikes in the market’s mind? Swaps currently show an 81 percent chance of a 25 bps increase next month – little changed from last week.

British Pound Will Find More Guidance from ECB than BoE

The ECB isn’t the only central bank policy meeting scheduled for tomorrow…but it’s the only one the market cares about. The Bank of England does not update the market with its reasoning or forecasts when it doesn’t change policy – and the consensus clearly believes that to be the outcome. A ‘European’ connection may very well carry more sway over the pound against pairs like USD and JPY via the ECB actions.

Chinese Yuan Rally Stalls as Stimulus Hold Necessitates FX Easing

April trade statistics were released by China this morning, and the data was a notable beat. A $18.5 billion surplus was 10 percent larger than the market consensus based on a 0.9 percent increase (year-over-year) in exports that was projected to contract 3.0 percent. This was a noteworthy release, but it hasn’t recharged the Yuan. With the PBoC on hold with stimulus, FX relief is essential.

Emerging Markets Firm Lead by Russian Rubble on De-escalation of Ukraine Tensions

The MSCI Emerging Market ETF advanced 0.5 percent while the Bloomberg EM Sovereign Bond Index advanced an eighth straight day to a 12-month high Wednesday fortified by the news that tensions in the Ukraine had eased. Russian President Vladimir Putin announced that his country’s army would pullback from Ukraine’s eastern border, while further calling for separatists in the country to call off the scheduled referendum. In the FX world, the Ruble surged 1.3 percent; while the next comparable performance was a 0.6 advance from Brazilian Real.

Gold Suffers Biggest Drop in 3-Weeks

Relief in geopolitical venues, a modest rebound for the US dollar and an eased sense of impending stimulus upgrades all contributed to gold’s 1.4 percent drop this past session. This was the biggest drop in three weeks and it would come on volume in the derivatives market, but we have not seen a trend secured. Meanwhile, the COT speculative positioning and three-year in ETF holdings will take on greater prominence. **Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

NZD

QV House Prices (YoY) (APR)

8.8%

Any lower print MoM puts less pressure on the RBNZ and possibly could show NZD weakness.

1:30

AUD

Employment Change (APR)

9.5K

18.1K

The Aussie employment print has shown to cause some of the most volatility in AUD crosses over any other data release.

1:30

AUD

Unemployment Rate (APR)

5.9%

5.8%

1:30

AUD

Full Time Employment Change (APR)

-22.1K

1:30

AUD

Part Time Employment Change (APR)

40.2K

1:30

AUD

Participation Rate (APR)

64.7%

64.7%

6:00

EUR

German Industrial Production s.a. (MoM) (MAR)

0.2%

0.4%

EUR crosses likely to be muted ahead of ECB.

6:00

EUR

German Industrial Production n.s.a. and w.d.a. (YoY) (MAR)

4.2%

4.8%

7:15

CHF

Consumer Price Index (MoM) (APR)

0.1%

0.4%

7:15

CHF

Consumer Price Index (YoY) (APR)

0.1%

0.0%

7:15

CHF

Consumer Price Index EU Harmonized (MoM) (APR)

0.6%

7:15

CHF

Consumer Price Index EU Harmonized (YoY) (APR)

-0.1%

11:00

GBP

Bank of England Interest Rate Decision

0.50%

0.50%

Note technicals on GBPUSD as it sits at multi-year highs.

11:00

GBP

Bank of England Asset Purchase Target

375B

375B

11:45

EUR

European Central Bank Interest Rate Decision

0.25%

0.25%

Market participants will look for any commentary on the recent CPI figures for April in the policy statement.

11:45

EUR

ECB Marginal Lending Facility

0.75%

0.75%

11:45

EUR

ECB Deposit Facility Rate

0.00%

0.00%

12:15

CAD

Housing Starts (APR)

177.0K

156.8K

Building Permits yesterday came in far below expectations and any weakness here in the data could prompt USDCAD strength. Especially if we see better than expected Initial Jobless Claims.

12:30

CAD

New Housing Price Index (MoM) (MAR)

0.2%

12:30

CAD

New Housing Price Index (YoY) (MAR)

1.5%

12:30

USD

Initial Jobless Claims (MAY 3)

344K

12:30

USD

Continuing Claims (APR 26)

2771K

23:50

JPY

Official Reserve Assets (APR)

$1279.3B

GMT

Currency

Upcoming Events & Speeches

9:00

EUR

Bank of Italy Report on Balance-Sheet Aggregates

12:00

USD

Fed's Charles Plosser Speaks on Monetary Policy

12:30

EUR

ECB President Mario Draghi Delivers Policy Statement

13:30

USD

Fed's Daniel Tarullo Speaks on Bank Regulation

13:30

USD

Fed's Charles Evans Speaks on Bank Regulation

16:30

CHF

SNB's Jean-Pierre Danthine Speaks on Swiss Economy

18:00

USD

Fed's James Bullard 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

7.5800

5.8950

6.5135

7.5800

5.8950

Resist 2

7.5800

5.8950

6.5135

Resist 1

6.8155

5.8475

6.2660

6.8155

5.8475

Resist 1

6.8155

5.8475

6.2660

Spot

6.5044

5.3655

5.9109

6.5044

5.3655

Spot

6.5044

5.3655

5.9109

Support 1

6.0800

5.3350

5.7450

6.0800

5.3350

Support 1

6.0800

5.3350

5.7450

Support 2

5.8085

5.2715

5.5655

5.8085

5.2715

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

1.3995

1.7052

102.57

0.8821

1.0965

0.9425

0.8729

142.77

1310.13

Res 2

1.3974

1.7028

102.38

0.8806

1.0949

0.9405

0.8709

142.49

1304.93

Res 1

1.3954

1.7005

102.20

0.8791

1.0934

0.9386

0.8689

142.21

1299.73

Spot

1.3912

1.6957

101.83

0.8762

1.0902

0.9347

0.8650

141.66

1289.34

Supp 1

1.3870

1.6909

101.46

0.8733

1.0870

0.9308

0.8611

141.11

1278.95

Supp 2

1.3850

1.6886

101.28

0.8718

1.0855

0.9289

0.8591

140.83

1273.75

Supp 3

1.3829

1.6862

101.09

0.8703

1.0839

0.9269

0.8571

140.55

1268.55

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.


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