Euro Bull Trend May Survive Draghi, Heavy Event Risk Ahead

DailyFX

  • Dollar Rally Halted as Risk Aversion Fails to Materialize
  • Euro Bull Trend May Survive Draghi, Heavy Event Risk Ahead
  • Japanese Yen: USDJPY Ends Longest Rally on Record, Now for a Turn?
  • British Pound Rally this Past Week a Relief Move, Not Permanent
  • Canadian Dollar Plunges after Employment Data
  • Australian Dollar Eying 1.0200 as Risk Trends Flutter
  • Gold Faces Near-Term Breakout as Traders Weigh Venezuela, G20, GDP

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Dollar Rally Halted as Risk Aversion Fails to Materialize

The dollar closed out an astounding week, but can the currency transition its impressive rally into a lasting bull trend? This coming week may very well determine the medium-term ambitions of the world’s most liquid currency. Before looking ahead, it is important to tally the currency’s score up until this point. Through Friday’s close, the Dow Jones FXCM Dollar Index (ticker = USDollar) actually suffered its worst one-day tumble in a month. However, the cumulative strength for the currency would still offer the highest weekly close for the benchmark since September of 2010. Furthermore, a greater legitimacy was given to the dollar’s underlying strength as EURUSD finally capitulated in its biggest drop (2.0 percent through the past week) since before current bull phase began back in late July.

Yet, as important a pair as EURUSD is, it cannot be the sole source of sustained dollar strength. In fact, the two largest individual contributors to its impressive performance over the past week and months are at considerable risk of withdrawing their self-sacrificing support. For the most liquid of currency pairs, the euro has suffered a significant setback this past week as the market fretted the European Central Bank (ECB) would join the movement to devalue its currency in order to remain competitive in a manipulated world. Central Bank President Draghi did mention the currency, but he is far from reversing the trend of a shrinking balance sheet. If FX traders recognize this, it could quickly revive the euro’s relative appeal – as the Federal Reserve has no intention of easing back from its $85 billion-per-month stimulus effort.

Far more crucial to the dollar’s performance over the past months, though, is the contribution made by USDJPY. Here too, the appeal is a competitive devaluation of the yen that bolsters the dollar’s appeal. We know Japanese officials’ intentions are resolute, but the currency has dropped substantially without tangible movement on easing – only threats. Should carry traders (who short the yen for the yield advantage in counterparts) recognize this, the USDJPY carries a considerable proportion of the dollar’s strength.

So, looking ahead, it seems that the dollar’s future is in the hands of its largest counterparts. Yet, there is a way that it can define its own fundamental fate and genuinely advance against most major counterparts: a meaningful drop in risk trends. Whether the catalyst is European GDP figures, the G30 growth forecasts, sequester fears or G20 currency war threats; it wouldn’t take much to ignite such dry tinder.

Euro Bull Trend May Survive Draghi, Heavy Event Risk Ahead

There was little mistaking the euro’s weakness this past week. Through the final trading session, the shared currency dropped against most counterparts; and the losses on the week ranged between 1.0 and 2.8 percent against its various pairings. That said, this wide-spread selling may prove temporary if the currency can keep its head above fundamental water. Critical is the market’s assumption of where the euro stands in the spectrum of the currency war. ECB President Draghi’s remark that a high currency can spill over to the central bank’s inflation and growth mandates, he didn’t spell out a threat to cut rates or link it to fresh stimulus. For tangible efforts, this is a very bullish-euro factor.

The more unpredictable risk to the euro moving forward is the short and medium-term impact that the scheduled docket holds. It seems the market conveniently ignores the fact that the Eurozone is in a recession, but we will certainly be reminded of this reality with the release of 4Q GDP figures from the Eurozone, Greece, German, et al. Another dredged up threat to the currency may come in the form of fear of a returning financial crisis. Finance Ministers are set to discuss Cyprus’ bailout, Greece’s progress and bank bailouts at the start of the week.

Japanese Yen: USDJPY Ends Longest Rally on Record, Now for a Turn?It had to end eventually. USDJPY’s epic 12-week long rally – the longest advance for the pair on record since the Gold Standard was dropped – finally came to an end with Friday’s close. That said, the 9-pip decline week-over-week is hardly an ambitious reversal. Momentum can build with the right encouragement however. At the center of the yen’s weakness is the fear of massive devaluation. This is certainly reasonable concern, but it has also moved well before the effort is realized. With Japan easing back before the G20, we may see traders follow suit.

British Pound Rally this Past Week a Relief Move, Not Permanent

The sterling put in for a monster performance through the end of this past week. In fact, the two-day rally for the pound against the dollar was the biggest this year; and versus the euro and loonie, the sharpest since November 1, 2011. This move began with an unwinding of stimulus expectations and then was parlayed into Prime Minister Cameron’s win at the EU budget. The problem: these aren’t lasting drivers…

Canadian Dollar Plunges after Employment Data

Between a significant miss in the labor data and an unexpected plunge in the housing sector, the Canadian dollar was hammered through Friday. January housing starts posted the biggest drop since April 2009 to the slowest pace since July of the same year. As for jobs, the 21,900-position drop in employment was the biggest in six months; and the downtick in unemployment comes from a drop in participation.

Australian Dollar Eying 1.0200 as Risk Trends Flutter

It’s telling of underlying risk trends when benchmark US equity indexes are closing at five-year highs, but the high-yield Australian dollar fades lower against most counterparts. AUDUSD is down 2.6 percent on the month, and a more serious break lower is dangerously close. Some of this may be due to repatriated ‘safe haven flows’ but if the traditional risk measures (shares) break lower, we will have a new driver: risk.

Gold Faces Near-Term Breakout as Traders Weigh Venezuela, G20, GDP

Gold has found itself into a terminal wedge with less than $20 of range to trade within. In other words, this metal is looking at a meaningful break from congestion in the coming week. Follow through depends on whether the spark is fundamentally derived. Talk of rescuing EZ members Monday, justified devaluation at the G20 or fading growth with 4Q GDP updates all speaks loudly to this alternative store of wealth.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:01

GBP

Lloyds Employment Confidence

-42

Upward trend since a rating of -75 on 12/2011

0:30

AUD

Home Loans (MoM)

0.0%

-0.5%

Volatile data set, 3-yr avg. of 0.1%, Range 3.7% to -5.5%

0:30

AUD

Investment Lending

-3.3%

Wild swings in data set

0:30

AUD

Owner-Occupied Home Loan Valueve (MoM)

0.6%

Growth remained below 2% since 4/2011, including -5.2% on 2/12

7:45

EUR

Industrial Production (MoM)

-0.2%

0.5%

Volatile data set, 5 yr. avg. of -0.1%

7:45

EUR

Industrial Production (YoY)

-2.1%

-3.6%

Previous growth at 3-year low, with 8.9% high on 5/10

7:45

EUR

Manufacturing Production (MoM)

-0.3%

0.2%

Volatile data set 3-year high of 2% on 8/12

7:45

EUR

Manufacturing Production (YoY)

-1.4%

-4.6%

Steady decline from 5-yr. high of 7.6% on 4/10

8:00

EUR

Spanish House Transactions (YoY) (DEC)

-6.1%

Souring mortgage debt is one of the greatest threats to the Spanish banking system and Spain

21:45

NZD

Card Spending - Retail (MoM)

0.3%

0.3%

Volatile data set, growth positive over the 3 consecutive months

21:45

NZD

Card Spending - Total (MoM)

0.4%

5-yr high of 2% on 8/12, avg. of 0.4%

23:50

JPY

Japan Money Stock M2 (YoY)

2.6%

2.6%

Remained at 2% or above since 5-yr. low of 1.8% on 10/08

23:50

JPY

Japan Money Stock M3 (YoY)

2.3%

2.2%

Positive trend since low of 0.5% on 4/08, above 1.5% since 3/09

GMT

Currency

Upcoming Events & Speeches

11:00

USD

Group of 30 Release Global Economy Report

13:30

EUR

Euro-Area Fin Mins Meet (Discuss Cyprus, Greece, Bank Rescues)

18:00

USD

Fed’s Yellen Speaks on Economy in Washington, D.C.

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

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.7088

1.7736

8.9165

7.7559

1.2389

Spot

6.4073

5.5620

5.5176

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

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

1.3532

1.5840

94.71

0.9256

1.0041

1.0383

0.8442

127.40

148.97

Resist. 2

1.3502

1.5810

94.41

0.9236

1.0025

1.0361

0.8420

126.91

148.48

Resist. 1

1.3472

1.5779

94.11

0.9216

1.0009

1.0338

0.8399

126.41

147.98

Spot

1.3412

1.5719

93.52

0.9175

0.9978

1.0294

0.8356

125.43

146.99

Support 1

1.3352

1.5659

92.93

0.9134

0.9947

1.0250

0.8313

124.45

146.00

Support 2

1.3322

1.5628

92.63

0.9114

0.9931

1.0227

0.8292

123.95

145.51

Support 3

1.3292

1.5598

92.33

0.9094

0.9915

1.0205

0.8270

123.46

145.02

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

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