Dollar’s Strong Rally Finds EURUSD, S&P 500 Unresponsive

By DailyFx | Updated September 03, 2014 AAA

DailyFX.com -

Talking Points:

  • Dollar’s Strong Rally Finds EURUSD, S&P 500 Unresponsive
  • Euro Firms Outside of EURUSD, Surge in Investor Appetite
  • British Pound Collapses Despite Data

Dollar’s Strong Rally Finds EURUSD, S&P 500 Unresponsive

The return of North American liquidity seemed to bring with it a strong demand for the dollar. The Dow Jones FXCM Dollar Index (ticker = USDollar) posted the biggest rally of its two-month bull trend in a move that drove the benchmark back to highs not seen in seven months. For those assessing the currency’s performance through the majors, confusion arose with EURUSD’s indifference. Having developed one of the most prolific trends amongst the majors – and in the dollar’s favor – the assumption would be that this pair should have made another thrust down to 1.3000 with the bid for the reserve. This is not a shortfall for the dollar. Rather this was a precarious balance founded in an equally-motivated counterpart. The Euro posted an impressive, market-wide rally of its own Tuesday. Don’t expect this stalemate to last though…

Given the greenback’s innate strength, we have to appraise the progress of its two dominant fundamental themes to see whether we have momentum moving forward. From the ‘safe haven’ perspective, there was another misleading barometer in the form of the S&P 500. As the personification of speculative appetite built on the chase for yield, the index was virtually unmoved on yet another sub-400 million share (low volume) day. However, that wasn’t the full story on speculators’ confidence. Looking at FX-based volatility measures, the one-month implied (expected) activity gauge for the currency market has hit its highest level in four months. Meanwhile, while there is still a considerable gap in the timing for rate hikes laid out by the FOMC and what the market is pricing in; there was a hawkish shift on the day. The US 2-year Treasury yield jumped 7 percent this past session and Fed Fund futures nudged higher, helped along by reports of the strongest pace of manufacturing growth (ISM report) in three years, a two-year high in construction spending and improvement in an economic sentiment survey (IBD). Ahead, the Beige Book is a minor holdover for NFPs, so watch risk trends.

Euro Firms Outside of EURUSD, Surge in Investor Appetite

If EURUSD’s performance was a distorted view of the Dollar’s health, it would similarly give a false read on the Euro. Aside from the benchmark pair, the shared currency gained between 0.6 (EURCAD) and 0.9 percent (EURGBP) versus its counterparts. The source of this strength seemed less bound by data and more a reflection of speculative positioning before significant event risk – the ECB rate decision on Thursday. The only indicator of proper scope on the Euro-area docket this past session was the factor inflation figure for August, which showed a persistent deflationary pressure. The same limited impact is seen in the upcoming session’s listings (service and composite PMIs). What we are likely seeing from the Euro is repositioning (profit taking, hedging, etc) after its hefty downdraft heading into the policy meeting. It is worth noting that the largest Europe ETF (Vanguard FTSE) recorded a record day of volume Tuesday. Is this hedging, speculation, profit taking?

British Pound Collapses Despite Data

Data over this past 24 hours from the UK seems to have raised the profile of the BoE rate forecast. The UK construction activity PMI unexpectedly hit a record high and the BRC’s retail inflation reading marked an unexpected moderation to its deflationary trend. Yet, that seemed to inspire little confidence in the FX ranks as the sterling lost ground to all counterparts – including a 0.8 percent drop for GBPUSD. Ignoring encouraging data is the sign of a ‘bearish’ sentiment. Expect greater impact if the PMI data disappoints today.

Yen Crosses: USDJPY a False Prophet?

There were a lot of exceptional moves this past session, and USDJPY was one of the most headline-worthy. The pair cleared 105 for the first time since January and has reinforced bulls’ confidence that a lasting trend is in place. However, again it is important to separate USDJPY performance from yen cross performance. The dollar’s outsized move and a rally from the Nikkei 225 provided a strong boost for this key pair. Yet, neither the other yen crosses nor other region’s equity indexes backed this move. Momentum is founded on theme, not single players.

Swiss Franc and Australian Dollar Little Swayed by Local GDP Figures

Both Switzerland and Australia released 2Q GDP figures this past session – and neither generated much in the way of consistency for their respective currencies. For the Aussie figures, a modest beat (0.6 versus 0.5 percent expected) offered little consolation to the material downgrade in activity from the previous quarter. For Switzerland, the miss was far more substantial – stagnation rather than growth. However, even that wouldn’t distract the markets from the focus on EURCHF and the march towards the SNB’s 1.2000-floor.

Emerging Market Currencies Unsettled by Rebound in Volatility Alongside Volume

The return of liquidity did little to inspire a return to one of the financial system’s most risky and stimulus-dependent asset classes: Emerging Markets. The MSCI ETF dropped for a third consecutive trading session (0.2 percent), the Bloomberg Sovereign Bond Index suffered its biggest decline in a month (0.3 percent) and the JPM EM Volatility Index jumped 2.5 percent. Volume and volatility are this group’s troubles.

Gold Suffers Major Break on Heavy Volume, Metal’s Volatility Reading Swells

A 1.6 percent drop was gold’s worst performance in eight weeks and unceremoniously drove the market through support on a 2014 ‘wedge’. This heft of this move was certainly amplified by the dollar’s own strength. However, even when we swap out less active currencies as pricing measures, the metal would still lose ground. Given the strength in the FX market’s top two liquidity currencies, limited scope on financial risks and a lingering appetite for yield; none of the checklist items for gold bulls were ticked off this past session.

**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

01:00

CNY

Non-manufacturing PMI (AUG)

54.20

Has shown a downtrend in the last three releases

01:30

AUD

Gross Domestic Product (YoY) (2Q)

3.0%

3.5%

Likely to be more influential on the Aussie than the status-quo RBA policy released yesterday

01:30

AUD

Gross Domestic Product (QoQ) (2Q)

0.4%

1.1%

01:35

JPY

Markit Japan Services PMI (AUG)

50.40

Services and composite sentiments showed expansion in July for the first time since March

01:35

JPY

Markit/JMMA Japan Composite PMI (AUG)

50.20

01:45

CNY

HSBC China Composite PMI (AUG)

51.60

Economic sentiment from China has again taken a downside after showing some improvement during the summer

01:45

CNY

HSBC China Services PMI (AUG)

50.00

07:45

EUR

Markit/ADACI Italy Composite PM (AUG)I

53.10

Sentiment in the Eurozone will be in focus as data from the region has been consistently weakening in recent months and the ECB is due to announce its monetary policy this week. An extended downward trend is likely to add bets for additional stimulus by the central bank, driving the Euro downward.

07:45

EUR

Markit/ADACI Italy Services PMI (AUG)

52.00

52.80

07:50

EUR

Markit France Composite PMI (AUG F)

50.00

50.00

07:50

EUR

Markit France Services PMI (AUG F)

51.10

51.10

07:55

EUR

Markit Germany Services PMI (AUG F)

56.40

56.40

07:55

EUR

Markit/BME Germany Composite PMI (AUG F)

54.90

54.90

08:00

EUR

Markit Eurozone Services PMI (AUG F)

53.50

53.50

08:00

EUR

Markit Eurozone Composite PMI (AUG F)

52.80

52.80

08:30

GBP

Markit/CIPS UK Composite PMI (AUG)

58.80

The Services PMI figures reported its highest figure since November 2013 last month

08:30

GBP

Markit/CIPS UK Services PMI (AUG)

58.50

59.10

08:30

GBP

Official Reserves (Changes) (AUG)

-$616M

Alternately increasing and falling in the last 7 months

09:00

EUR

Euro-Zone Retail Sales (MoM) (JUL)

-0.3%

0.4%

Year-on-year retail sales has been expanding in a weakening Eurozone this year

09:00

EUR

Euro-Zone Retail Sales (YoY) (JUL)

0.9%

2.4%

11:00

USD

MBA Mortgage Applications (AUG 29)

2.8%

Rose for 2 straight weeks for the first time since June this year

13:45

USD

ISM New York (AUG)

68.10

Strongest report since Nov 2013

14:00

CAD

Bank of Canada Rate Decision (SEP 3)

1.0%

1.0%

Rate decision is coming out on the backdrop of strong employment and GDP figures

14:00

USD

Factory Orders (JUL)

11.0%

1.1%

Expected to rise the most since the release began, reflecting strong US market sentiment

GMT

Currency

Upcoming Events & Speeches

03:20

AUD

RBA Governor Stevens Speaks at CEDA Function in Adelaide

11:00

USD

CEO Energy-Power Conference Day 2

18:00

USD

U.S. Federal Reserve Releases Beige Book

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

You May Also Like

Related Forex Analysis
  1. Forex News

    EUR/USD steady into Tokyo bettered offered

  2. Forex News

    Why the Fed may underestimate disinflation - Rabobank

  3. Forex News

    Key events to come - Westpac

  4. Forex News

    EUR/USD heading to fresh year lows? - FXStreet

  5. Forex News

    US session recap: FOMC…dovish, hawkish, bullish/bearish?

Trading Center