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Forex pairs in this Article » USD, AUD/USD, EUR/USD, GBP/USD, NZD/USD, USD/CHF, USD/CAD, USD/JPY, GOLD
Talking Points:

  • Dollar Outlook Improves after Hawkish FOMC Minutes
  • Euro: What’s the Probability of an ECB-Led Collapse?
  • British Pound Traders Won’t Hold Their Breath for the BoE
Dollar Outlook Improves after Hawkish FOMC Minutes

A clear, hawkish tone from the FOMC minutes this past session fortified the central bank’s Taper bearing and in turn supported the dollar to further gains. Looking at the currency’s performance on the day, the unit advanced against all but the sterling – although the gains were relatively modest (between 0.2 and 0.5 percent). The restraint speaks volumes to technical trader who see meaningful dollar resistance for pairs like EURUSD and USDJPY in the immediate foreground. The same boundary is reflected on the Dow Jones FXCM Dollar Index (ticker = USDollar) which has held below 10,720 for the past three weeks. Yet, as this ceiling has held in place, progress in general has floundered – so much so that the Average True Range (ATR, a good volatility gauge) has dropped to its lowest level in 12 months. What does this mean? The market is exceptionally quiet for the dollar and a breakout is a high probability. Just in time for a Friday NFPs on the heels of the Taper…

Meanwhile, many traders are still surprised by the dollar’s and S&P 500’s lack of response to the Fed’s change in monetary religion. The chart comparing the performance of risk-laden capital markets and the central bank’s balance sheet (one that I have and will continue to refer to often) has increased the anxiety and appetite for an abrupt change in investor habits. Yet, the implications of an untethered risk backdrop have yet to upset the balance of complacency. It is making progress though…

In the minutes for the Fed’s December 17-18 meeting, the central bank noted “many” supported tapering the QE program in “measured steps” as labor markets show ongoing improvement and inflation moves slowly back towards the 2 percent target. That sets objective and justification. More interesting was the suggestion that there was a sense of waning benefit in the monthly purchases and rumination that stimulus could generate financial stability risks due to its support of excessive risk taking. Some may take the S&P 500’s 0.6 percent advance (notably the largest since the Taper) evidence that the market in apathetic to the policy implications, but Treasuries paint a different picture. Two-year yields advanced to their highest level since September 13. Pressure is building. Perhaps the eruptions comes with a catalyst like Friday NFPs.

Euro: What’s the Probability of an ECB-Led Collapse?

Most major central banks have a dual mandate: to promote steady inflation and full ‘natural’ employment. This past Tuesday, core inflation for the Eurozone dropped to a record low (0.7 percent) and this past session the region’s unemployment rate held at a record high (12.1 percent). That is a nerve-racking position to be in just before the ECB’s monetary policy decision. The central bank’s 25 bp rate cut in November is still fresh in traders’ minds, but we know the rope has run out along this standard line of monetary policy. A further cut to zero would yield little benefit. Speculation of further accommodation has focused on negative deposit rates or introducing a new, targeted stimulus program. Yet, these are moves not easily decided. Either would be euro negative as it would reduce market rates and draw a stark contrast to the dollar. However, neither is likely as there is little of the financial pressure of years’ past and they would likely sound the alarm well in advance.

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British Pound Traders Won’t Hold Their Breath for the BoE

The Bank of England policy rate decision Thursday is ‘the other’ monetary policy event for the day. In contrast to the ECB where there is a material possibility of policy changes and President Draghi offers impressions for the market to assess future bearings, the UK’s central bank is typically mum when there are no meaningful changes to the schema. No update helps the sterling’s position. The fundamental trend for the currency is a six-month rally forged out of a dramatic shift forward in rate expectations (seeing a hike now as early as late 2014). Anything that definitively undermined that view could seriously deflate the rally. To that point, the trade report may carry more impact than the BoE.

Yen Crosses Struggling to Return to Prevailing Trend

The yen crosses’ recovery effort following the correction between January 1st and 6th is uneven and unconvincing. While a strong risk appetite element is certainly absent, a low volatility (as a measure of ‘risk’) environment should theoretically still promote dominant trends and a reversion back to a relative monetary policy view where the BoJ is considered the world’s most liberal stimulus purveyor. One or both of these themes is shaken. Short-term FX-based risk measures are elevated. As for stimulus, we are still months out and we’ve had few reassurances recently.

Canadian Dollar Extends Decline after Poloz Says Not Under Pressure to Hike

There was little doubt that the Canadian dollar was the worst performer amongst the majors for the day. The currency dropped against all of its counterparts, with a notable performance from USDCAD as it broke to fresh three-year highs above 1.0800. This loonie tumble is a fundamental snowball building girth on Flaherty talking down the currency Monday, weak data Tuesday and Poloz writing off rate pressure Wednesday.

Australian Dollar Close to Fresh Five-Year Lows Versus Kiwi

The two favored carry currencies amongst the majors are close to hitting a fresh extreme in a technical sense. Yet, the fundamental gap continues to close. AUDNZD is just above the December 18 low – a five year low – and the Aussie dollar is under pressure in other corners of the market. Yet, the 10-year yield differential is only 40 bps wide and the yield forecast gap is 7 bps narrower this past week.

US Oil Revives the Bear, Drops Below $93

So much for the effort to turn the bear tide on oil. After Tuesday’s indecisive performance, the commodity dropped another 1.4 percent this past session. Form the December 27 peak, the commodity is down 8.4 percent. If the market slips below $92, we will return to lows not seen in eight months. For supply and demand, DoE implied demand hit a January 3, 2013 low. But the issue is likely structural as the Brent spread shows.

Gold Likely to Overlook ECB and BoE in Favor of Friday NFPs

There are three major roles gold played in its incredible rally through 2011. We may see the market revisit one of those lost titles through the final 48 hours of the trading week. On deck, we have the ECB and BoE rate decisions. Given the latter will likely be silent and the former is hesitant to move to QE, gold’s hopes are minimized. This is especially true with the NFPs potentially leveraging the dollar Friday.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Retail Sales MoM (Nov)

0.4%

0.5%

September’s print was the best since early 2013.

0:30

AUD

Building Approvals MoM (Nov)

-1.0%

-1.8%

MoM was est. -3.0% last week. YoY was est. 20.1% last week.

0:30

AUD

Building Approvals YoY (Nov)

21.1%

23.1%

01:30

CNY

CPI YoY (Dec)

2.70%

3.00%

Market participants will view lower inflation levels as China/AUD bullish as it leaves room for further accommodation by the PBOC.

01:30

CNY

PPI YoY (Dec)

-1.30%

-1.40%

7:45

EUR

France Trade Balance (Nov)

-4600M

-4697M

The French print has been south of -4000 all but once since 2011.

9:00

EUR

Italy Deficit to GDP YTD (3Q)

4.10%

9:30

GBP

Visible Trade Balance GBP/Mn (Nov)

-£9450

-£9732

Visible Trade Balance GBP/Mn is just above all-time lows.

9:30

GBP

Trade Balance Non EU GBP/Mn (Nov)

-£3254

9:30

GBP

Trade Balance (Nov)

-£2619

10:00

EUR

Economic Confidence (Dec)

99

98.5

Price action may be limited / moves may be faded here ahead of event risk with the ECB at 12:45GMT. Industrial Orders out of Germany may support the Euro following better than expected German Factory Orders on Wednesday.

10:00

EUR

Business Climate Indicator (Dec)

0.18

10:00

EUR

Consumer Confidence (Dec F)

-13.6

-13.6

10:00

EUR

Services Confidence (Dec)

-0.8

10:00

EUR

Industrial Confidence (Dec)

-3

-3.9

11:00

EUR

Germany Industrial Production SA MoM (Nov)

1.50%

-1.20%

11:00

EUR

Germany Industrial Production WDA YoY (Nov)

3.00%

1.00%

12:00

GBP

Bank of England Bank Rate

0.50%

0.50%

BoE price action has remained limited as Carney’s BoE has been light on the statements.

12:00

GBP

BOE Asset Purchase Target (Jan)

375B

375B

12:30

USD

Challenger Job Cuts YoY (Dec)

-20.60%

The Challenger Job Cuts print has been on the decline since August.

12:30

USD

RBC Consumer Outlook Index (Jan)

49.7

12:45

EUR

ECB Announces Interest Rates

0.25%

0.25%

Any serious mention of Negative Deposit Facility Rates or new QE would adversely impact the Euro when the Fed is Tapering

12:45

EUR

ECB Deposit Facility Rate

0.00%

0.00%

12:45

EUR

ECB Marginal Lending Facility

0.75%

0.75%

13:15

CAD

Housing Starts (Dec)

192.2K

With USD/CAD pushing multi-year highs, negative data out of Canada may add more fuel to its push higher.

13:30

CAD

Building Permits MoM (Nov)

7.40%

13:30

CAD

New Housing Price Index MoM (Nov)

0.10%

13:30

CAD

New Housing Price Index YoY (Nov)

1.50%

13:30

USD

Initial Jobless Claims (Jan 4)

320K

339K

This will be the last insight into the U.S. jobs market before NFPs on Friday. ADP Employment Change figures beat on Wednesday.

13:30

USD

Continuing Claims (Dec 28)

2833K

14:45

USD

Bloomberg Consumer Comfort (Jan 5)

-28.7

23:50

JPY

Official Reserve Assets (Dec)

$1275.4B

Foreign buying of Japanese bonds last week was the lowest since late September.

23:50

JPY

Japan Buying Foreign Bonds (Jan 3)

-¥680.6B

23:50

JPY

Japan Buying Foreign Stocks (Jan 3)

-¥141.4B

23:50

JPY

Foreign Buying Japan Bonds (Jan 3)

-¥776.7B

23:50

JPY

Foreign Buying Japan Stocks (Jan 3)

¥838.3B

GMT

Currency

Upcoming Events & Speeches

1:00

JPY

Bloomberg Jan. Japan Economic Survey

10:00

EUR

Italy Bank of Italy Report on Balance-Sheet Aggregates

13:30

EUR

ECB President Draghi Presser

15:00

USD

House Monetary Policy Subcommittee Hearing on Fed Bond Buying

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

13.4800

2.2500

11.8750

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2400

2.2000

10.7250

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.1270

2.1840

10.7668

7.7544

1.2722

Spot

6.5748

5.4941

6.1988

Support 1

12.6000

2.1000

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.4200

1.7500

9.3700

7.7450

1.1800

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

1.3681

1.6565

105.91

0.9204

1.0923

0.8969

0.8343

144.00

1252.06

Res 2

1.3655

1.6535

105.65

0.9183

1.0903

0.8947

0.8321

143.60

1245.82

Res 1

1.3630

1.6506

105.38

0.9162

1.0882

0.8925

0.8300

143.20

1239.58

Spot

1.3579

1.6447

104.86

0.9121

1.0842

0.8881

0.8256

142.40

1227.10

Supp 1

1.3528

1.6388

104.34

0.9080

1.0802

0.8837

0.8212

141.60

1214.62

Supp 2

1.3503

1.6359

104.07

0.9059

1.0781

0.8815

0.8191

141.20

1208.38

Supp 3

1.3477

1.6329

103.81

0.9038

1.0761

0.8793

0.8169

140.80

1202.14

v



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