Dollar Rally Forces EURUSD and USDJPY Breaks

By DailyFx | Updated August 20, 2014 AAA

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Talking Points:

  • Dollar Rally Forces EURUSD and USDJPY Breaks
  • British Pound Surprised by BoE Hawks, But Doesn’t Turn
  • Euro Traders Ready for Another Round of Economic Data

Dollar Rally Forces EURUSD and USDJPY Breaks

Between two days of key event risk, it seemed that the US Dollar was due a period of moderation. However, this past session was anything but. The normally boilerplate FOMC minutes offered up a surprisingly hawkish lean and extended the currency’s impressive run this week. This extension has raised the stakes for the dollar’s trends. Aside from the Dow Jones FXCM Dollar Index (ticker = USDollar) advancing to six-month highs, we find that many of the majors are attempting to tip the scales into key breakouts. Key among these standout moves are EURUSD, GBPUSD and USDJPY. Each carries a different level of fundamental headwind and thereby carries a different gauge of the dollar’s strength. EURUSD sets the currency against a currency that projects an economic performance and monetary policy bearing that stands into direct contrast to the US. The Cable is a more significant fundamental balance with UK growth and BoE rate forecasts outpacing their counterpart. Then there is USDJPY – a cross that shares a distinct relationship to equities through carry and investor appetite.

For the dollar to maintain this exceptional run, its fundamental backing will have to build steadily. The current trend has been founded on a material upgrade to interest rate expectations. Tuesday’s July CPI figure may have kept the ‘mid-2015’ time frame for the first Fed hike in contention, but falling in-line with consensus did little to embolden rate hawks or convert the complacent and doves. The Fed minutes were far more effective in that capacity. According to the transcript of the July 29-30 meeting, “many Fed officials” believed the pace of job gains may bring forward the first Fed hike. On inflation, “most” saw downside pressures on price growth diminishing. While not stamping a specific date on the first 25bp hike, this presents a tangible hawkishness. Ahead, we are set for another round of rate fodder in US manufacturing activity data and the start of the Jackson Hole Symposium. One element in this slow but measureable change in monetary policy from one of the first adopters is its impact on risk trends. Will the low volatility environment hold out as the easy money is slowly reined in?

British Pound Surprised by BoE Hawks, But Doesn’t Turn

While the Fed’s minutes will no doubt stand out in peoples’ memory longer because of the dollar’s response, the Bank of England’s review was just as remarkable. Breaking from the trend of unanimity for the MPC, we learned that the vote to hold rates was actually 7-2. Members Weale and McCafferty voted for a 25 basis point rate hike at the last meeting. While this is still far from consensus, voices calling for action now means the ultimate hike is much closer than it has been in years. Ahead, retail sales and a 10-year Gilt sale present second tier event risk.

Euro Traders Ready for Another Round of Economic Data

Last week, the Euro’s fortunes dimmed significantly when 2Q GDP figures showed the ‘core’ economies had stalled or contracted. Though European equity indexes have held steady through the disappointment, the implications are significant. A drop in economic activity will temper investor returns and could lead governments to put their deficit reduction goals on hold. That in turn could reverse the record low sovereign borrowing costs and reverse capital inflows. Ahead, we have PMI figures to tell us whether August activity has improved at all.

USDJPY Position on a Different Level than Other Yen Crosses

This past session, GBPJPY recovered from a near breakdown and EURJPY edged above trendline resistance. In comparison, USDJPY put in for a genuine break higher. This was in large part due to the bullish performance of the dollar, but the general performance for these crosses is remarkable. The BoJ has offered little change in tone to suggest they are willing to upgrade their anti-yen policies, so the focus in this performance is fully on risk trends. Yet, the motivations behind sentiment and carry trade are shaky. Can risk appetite really hold firm while economic activity cools? Watch for discussions about health of the global economy and financial market at Jackson Hole.

Australian Dollar Drops after Chinese PMI Misses

Australian data released this morning was modestly encouraging. The June Conference Board Leading Index grew 0.4 percent to offer support through the traditional growth channels. Meanwhile, the capital markets were bolstering the appeal of carry currencies like the Aussie dollar with equity markets on the rise. And yet, the Australian currency took a nasty spill. The source of this move was the August HSBC Chinese Manufacturing PMI. Though still reflecting growth (above 50), the substantial miss of expectations with a 50.3 print clearly unnerved traders.

Emerging Markets: Stimulus Tide Turn Could Spell Trouble

Developed world equity markets didn’t’ seem too troubled by the implications of an earlier end to easy US monetary policy, but the Emerging Markets seem to have taken it to heart. The MSCI EM ETF slipped for the first time in three days (0.2 percent) just after printing a new 18-month high. In the FX market, the EM currencies were heavily coated in red with majors like the Turkish Lira down 1.0 percent, South African Rand off 0.9 percent and Mexican Peso lower by 0.7 percent.

Gold’s Decline Notably Slower than Dollar’s Advance

There is a meaningful divergence in the relative performance of gold and the US Dollar. As the currency is the common pricing instrument for the commodity, their moves are often mirrors not just in direction but magnitude as well. Yet, where gold is down for four consecutive days through Wednesday, it’s losses are far more constrained than the greenback’s gains. Perhaps that safe haven demand is gaining some traction.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

00:00

AUD

Conference Board Leading Index (JUN)

0.2%

The House affordability Index has seen an uptrend for the last few years, rising from 52.5 in Q2 of 2010

01:00

AUD

CBAHIA House Affordability (2Q)

77.20

01:00

AUD

ANZ Consumer Confidence (MoM) (AUG)

0.6%

01:30

AUD

RBA FX Transaction (Australian dollar) (JUL)

1271M

RBA FX transactions usually peak during the Aussie winter months

01:30

AUD

RBA FX Transactions Government (JUL)

-1293M

01:35

JPY

Markit/JMMA Japan Manufacturing PMI (AUG P)

51.50

50.50

Sentiment has fallen from a high of 56.6 in Jan to 50.5 in July

01:45

CNY

HSBC China Manufacturing PMI (AUG P)

51.50

51.70

Been reported higher than expected in the last two months

03:00

NZD

Credit Card Spending (MoM) (JUL)

0.7%

Credit card spending has risen since Oct 2009 in NZ, reflecting a strong consumer sentiment

03:00

NZD

Credit Card Spending (YoY) (JUL)

7.0%

06:00

CHF

Trade Balance (Swiss franc) (JUL)

1.85B

1.38B

Switzerland’s trade balance has always reflected greater exports than imports since August 2005

06:00

CHF

Exports (MoM) (JUL)

5.6%

06:00

CHF

Imports (MoM) (JUL)

10.8%

07:00

CHF

Money Supply M3 (YoY) (JUL)

4.0%

Sharp drop last month from the 8%+ levels since June 2012

07:00

EUR

Markit France Composite PMI (AUG P)

49.60

49.40

French manufacturing has contracted in 5 of 7 months YTD

07:00

EUR

Markit France Manufacturing PMI (AUG P)

47.80

47.80

07:30

EUR

Markit/BME Germany Manufacturing PMI (AUG P)

51.50

52.40

Manufacturing PMI has largely been on the downtrend from a YTD high of 56.5 in January

07:30

EUR

Markit/BME Germany Composite PMI (AUG P)

54.60

55.70

08:00

EUR

Markit Eurozone Manufacturing PMI (AUG P)

51.30

51.80

PMI Data is anticipated to be lower than last month’s, and a poor report might add bets to additional stimulus from the ECB

08:00

EUR

Markit Eurozone Services PMI (AUG P)

53.70

54.20

08:00

EUR

Markit Eurozone Composite PMI (AUG P)

53.40

53.80

08:30

GBP

Retail Sales (MoM) (JUL)

0.4%

-0.1%

Retail Sales data from the UK will be in focus after GDP And CPI data were mostly in line with expectations, and higher than expected numbers might stir rate hike speculations from the BoE

08:30

GBP

Retail Sales (YoY) (JUL)

3.5%

4.0%

08:30

GBP

Retail Sales Incl. Auto (MoM) (JUL)

0.4%

0.1%

08:30

GBP

Retail Sales Incl. Auto (YoY) (JUL)

3.1%

3.6%

08:30

GBP

Public Finances (PSNCR) (Pounds) (JUL)

11.8B

The UK public sector has consistently borrowed in the last 4 months to finance their deficit

08:30

GBP

Public Sector Net Borrowing (Pounds) (JUL)

-1.7B

9.5B

12:30

USD

Initial Jobless Claims (AUG 16)

303K

311K

Employment remained a big concern in latest FOMC minutes

12:30

USD

Continuing Claims (AUG 9)

2520K

2544K

13:45

USD

Markit US Manufacturing PMI (AUG P)

55.30

55.80

Low of 51.0 in Oct 2012, showing an improving US manuf. sector

14:00

USD

Philadelphia Fed. (AUG)

19.70

23.90

Outlook has largely been positive since February this year

14:00

USD

Existing Home Sales (JUL)

5.02M

5.04M

The US reported better than expected housing data earlier this week, adding more rate hike bets

14:00

USD

Existing Home Sales (MoM) (JUL)

-0.5%

2.6%

14:00

EUR

Euro-Zone Consumer Confidence (AUG A)

-9.10

-8.40

Negative sentiment since Feb’01

14:00

USD

Leading Indicators (JUL)

0.6%

0.3%

Leading Indicators have been reflecting an improving US economy since Feb this year

GMT

Currency

Upcoming Events & Speeches

-:-

USD

Kansas City Federal Reserve Jackson Hole Symposium

01:30

AUD

RBA FX Transactions Market

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.3250

2.3000

11.8750

7.8075

1.3250

Resist 1

7.3285

5.8475

6.3145

Spot

13.0707

2.1529

10.5535

7.7507

1.2463

Spot

6.8573

5.5796

6.1569

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

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

1.3435

1.6781

103.17

0.9123

1.0969

0.9386

0.8543

137.87

1329.49

Res 2

1.3417

1.6757

103.00

0.9110

1.0953

0.9369

0.8527

137.64

1325.18

Res 1

1.3399

1.6733

102.83

0.9096

1.0936

0.9352

0.8510

137.41

1320.87

Spot

1.3362

1.6684

102.49

0.9069

1.0904

0.9319

0.8476

136.95

1312.25

Supp 1

1.3325

1.6635

102.15

0.9042

1.0872

0.9286

0.8442

136.49

1303.63

Supp 2

1.3307

1.6611

101.98

0.9028

1.0855

0.9269

0.8425

136.26

1299.32

Supp 3

1.3289

1.6587

101.81

0.9015

1.0839

0.9252

0.8409

136.03

1295.01

v

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