US Dollar Smashed by Fed, Bernanke; Aussie Up on Jobs, Yen on BoJ

DailyFX

ASIA/EUROPE FOREX NEWS WRAP

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is down modestly on the day, having recovered half of its losses this week following dovish saber rattling from the Federal Reserve. Price action today has been largely dictated by what began on June 19, when the Fed suggested that it could wind down is QE3 easing program by mid-2014, given the recent improvement in the US labor market. From the low on June 19 to the yearly high set on Monday, July 8, the USDOLLAR rallied by +4.74%.

The optimism surrounding the US Dollar was dispelled quickly yesterday after the Fed’s June meeting Minutes showed the policymakers remained split over the timing of when to end QE3, and then at a policy speech after the US cash equity close when Chairman Bernanke said that tapering QE3 wouldn’t mean the Fed’s accommodative policy stance would change. This is important because it highlights the distinction between “tapering” and “tightening”: the Fed has merely indicated that it will slow, not stop, its easing measures.

It is of little surprise that the other majors, berated by the US Dollar since mid-June, have made a strong comeback. In fact, since Monday’s high, the USDOLLAR is now off by -1.69%, and was down by as much as -2.19% overnight. The Australian Dollar has posted modest gains following an improved June Australian labor market report, while the Japanese Yen has garnered favor following the Bank of Japan’s policy hold earlier today.

Read more: British Pound Plummets to Lows, but is it Too Much Too Soon?

Taking a look at European credit, peripheral yields have jumped on the day while core yields have fallen; putting upward pressure on Italian- and Spanish-German spreads (typically a sign of Euro-Zone sovereign debt crisis stress). The Italian 2-year note yield has increased to 1.662% (+9.2-bps) while the Spanish 2-year note yield has increased to 2.072% (+7.3-bps). Likewise, the Italian 10-year note yield has increased to 4.476% (+3.2-bps) while the Spanish 10-year note yield has increased to 4.838% (+4.9-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:45 GMT

CHF: +1.11%

GBP: +0.85%

CAD: +0.79%

EUR:+0.75%

NZD:+0.68%

AUD:+0.57%

JPY:+0.47%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.57% (-0.84% prior 5-days)

ECONOMIC CALENDAR

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TECHNICAL ANALYSIS OUTLOOK

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EURUSD: The EURUSD was flirting with a H&S breakdown but instead rebounded sharply off of the purported Neckline and achieved price over $1.3200. Today’s close is very important for sentiment headed into next week; a close below 1.3083 would signify a 50% pullback of today’s rally and set up an Inverted Hammer (bearish reversal candle). I maintain: “A [weekly] close below 1.2800 tentatively triggers the broader Head & Shoulders pattern, whose measured move points to a return to the June 2010 lows near 1.1875.”

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USDJPY: No change from Tuesday: “The rejection of the 76.4% Fib retracement at ¥101.35/40 (May high to June low) is only a near-term setback, as the break off of the late-May to mid-June correction in the pair completed the last week of June. Furthermore, a run to RSI resistance should be accompanied by price accompanying higher towards 102.40/60. Looking to buy dips as long as 99.00/25 is held.” An Inverted Hammer today with a close above 99.00/25 would suggest longs preferred into early next week.

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GBPUSD: No change: “Big picture: the GBPUSD broke the uptrend off of the 2009, 2010, and 2012 lows, signaling the beginning of a greater selloff towards 1.4200/50. Any rallies in the pair look to be sold; price could climb to 1.5290 (50% Fib March low to May high) on a rebound now that the GBPUSD has broken through RSI trend support off of the March 12 and May 29 lows. Price has undercut key Bear Flag support off of the March 12 and May 29 lows; and now the move towards 1.4200 appears to have begun.” The rally the past two days has seen price trade back to the underside of the Bear Flag, and ideal selling opportunity.

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AUDUSD: No change: “Fresh selling has provoked an even steeper decline in the AUDUSD, with the pair falling towards the 38.2% Fibonacci retracement off the 2008 low to the 2011 high at $0.9141. While fundamentally I am long-term bearish, it is worth noting that the most readily available data shows COT positioning remains extremely short Aussie. Bullish divergence on the daily chart has formed once more, suggesting that consolidation or perhaps a small rally back towards 0.9330/420 is due; or another quick, sharp drop is necessary to clear the technical discrepancy.”

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S&P 500: Last week I said “now price finds itself on its way towards mid-June swing highs and the 76.4% Fib retracement (May high June low) at 1655/60.” Gains have accelerated, with the S&P 500 achieving the 88.6% Fib retracement at 1672/75 overnight; a test of the yearly and all-time high at 1687.4 shouldn’t be discounted yet.1640 is key support for bulls.

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GOLD: No change “Gold has fallen into the 10/20 RSI support region, where price has held on numerous probes lower ultimately producing a short-term rally. More recently, daily RSI has only dipped into this region in mid-February and mid-April…Basing just below $1200/oz shouldn’t be dismissed, as at 1189.91 lies the 100% extension of March high/April low/April high move, as well as the 61.8% extension of the October high (post-QE3 announcement)/April low/April high move at 1192.” It should be noted that the rally off of Friday’s low has produced a maximum of +10.02% so far, eclipsing the rebound seen from late-May to early-June, when Gold rebounded by +6.36%.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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