• Dollar Recovery is Based on FOMC Threat, Not Manufacturing Strength
  • British Pound Advance Curbed by Mixed Housing, Factor Data and Concern over Upcoming BoE
  • Australian Dollar Surges after RBA Ignores CPI Data, Hikes to 4.75%
  • Euro Under Greater Stress as Regional Finances Coming Into Focus, Fed Threatens weaker Dollar
  • New Zealand Dollar Backs off Two-Year Highs as Inflation Expectations Cool, Wages Increase
  • Japanese Yen Temporarily Plunges on Intervention Fear, Later Chalked up to Miss-Hit

Dollar Recovery is Based on FOMC Threat, Not Manufacturing Strength

Often times, in the pursuit of an easy and tidy explanation; we find that financial media and our own analysis guides us to a dubious account of the market’s fundamental developments. That said, it is important to realize that cause and effect is not the same thing as coincidental happenstance. This is the critical view we need to take of the US dollar and S&P 500 through Monday’s session. It is easy to fall back into the suggestion that the global round of manufacturing data (bullish across the board) was a key driver towards risk appetite or late-session confidence in the greenback. More credible is the reality that we are seeing both the benchmark currency and speculatively-defined equity market respond to the volatility and ultimate bounds imposed by the big-ticket FOMC rate decision. This event holds so much sway over the underlying investor sentiment and the direction of capital flows through the near and medium-term that taking any position in size ahead of the announcement is generally considered overtly risky. In fact, this has been the general consensus for the better part of three weeks. For evidence, we simply need to reference the progress (or lack thereof) from the S&P 500 and dollar. For the index, it may still fit within the rising trend channel of the past two months; but the past three weeks has seen the market trade within a range little more than 30 points. For the greenback, EURUSD has carved a congestion pattern of 400 pips that stands in stark contrast to the previous 1,400 pip rally before it.

As investors and traders keep their sights set on the ultimate decision from the Board of Governors’ two-day, policy meeting beginning tomorrow, there will be a strong anchor on any effort to generate a meaningful trend for risk appetite and the US dollar. There is simply too great a threat of volatility following the actual event for early positioning to prove reasonably profitable. As it is, there are sound arguments for drawing up scenarios whereby the Fed’s actions could drive sentiment and the dollar to new highs or encourage its further collapse (we’ll cover these scenarios in greater detail tomorrow). What’s more, it is the proximity of this impending threat that helped to curb the influence of otherwise market-moving economic data scheduled for release Monday. Earlier in the New York Session, the Commerce Department released its September personal consumption and income figures. Considering consumer spending accounts for approximately three-quarters of US GDP, the influence in this data is undeniable. That said, consumption in the month grew half what was expected at 0.2 percent and income fell (by 0.1 percent) for the first time since July of the previous year. This could be construed as a sign of weaker activity; and consequently a means of support for grater stimulus from the central bank; but at this point, speculation of the outcome is well fleshed out. The same consensus can be drawn with the ISM manufacturing report for October. Factory activity may have hit a five-month high through new orders and activity; but this will do little to offer last minute adjustments.

Looking at the next 36 hours of trading, we will be in the lull before the fundamental storm. This is an interesting situation considering Tuesday brings the mid-term elections. This could have a significant impact on fiscal expectations; but it won’t play out until after the Fed does its thing.

Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: The Top Trading Opportunities on FOMC: USDCHF and USDJPY

British Pound Advance Curbed by Mixed Housing, Factor Data and Concern over Upcoming BoE

The British pound is fundamentally confused. On the one hand, the currency has appreciated against its US and Eurozone counterparts recently; but then again, the United Kingdom’s financial and economic health are under considerable debate. Here too speculation surrounding policy is keeping the currency anchored. Yet, in direct contrast to the oversaturated, dovish outlook for the Federal Reserve, the Bank of England is actually expected to take a neutral position at its Thursday meeting – a move that would be considered bullish when contrasted against the bearings of other policy groups. Further support for the Monetary Policy Committee (MPC) to hold off from increasing its bond purchasing program this time around was the PMI manufacturing report which unexpectedly rose for the first time in six months. Less encouraging was the first drop in the annualized housing prices through the Hometrack (0.9 percent) since January of 2009.

Australian Dollar Surges after RBA Ignores CPI Data, Hikes to 4.75%

Expectations heading into the first central bank decision this week were generally neutral. The RBA had backed off the aggressive rhetoric and had seen a drop in the 3Q CPI data to below the tolerance band last week. And yet, these general expectations set the market up for a greater surprise when the central bank in fact hiked another 25 bps to 4.75 percent. The group noted early modest tightening was prudent.

Euro Under Greater Stress as Regional Finances Coming Into Focus, Fed Threatens weaker Dollar

Scheduled event risk was light for the euro; but the docket isn’t necessarily the most pressing front for those FX traders looking to position themselves in the shared currency. Far more interesting is the euro’s ability to abstain from loosening monetary policy when its currency is rallying and growth takes a more divergent path for members. With that, we note Portugal is near finding agreement on its 2011 budget.

New Zealand Dollar Backs off Two-Year Highs as Inflation Expectations Cool, Wages Increase

Through Friday’s close, NZDUSD managed to drive through a very obvious technical resistance level in 0.7650. When this is the only dollar-based pair really threatening headway, the promise of follow through will naturally be limited. And, come Monday’s open, we could see that skepticism start to filter through. Further adding to that temperance, we saw that one-year inflation expectations from AON dropped sharply.

Japanese Yen Temporarily Plunges on Intervention Fear, Later Chalked up to Miss-Hit

Early in the Asian session Monday morning, the Japanese yen plunged against the dollar and its other major counterparts. Naturally, the market would react to any fast movement in this particular currency as unrequited evidence that the Bank of Japan intervened. However, this belief was backtracked after a Reuters article suggested a large ‘miss-hit’ order was responsible and subsequently sowed the seeds of BoJ fear.

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ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

NZD

21:45

Average Hourly Earnings (QoQ) (3Q)

0.6%

2Q rise was the first in 9 months.

JPY

23:50

Monetary Base (YoY) (OCT)

5.8%

Rose over 5% YoY in last 3 months.

AUD

3:30

Reserve Bank of Australia Interest Rate Decision

4.50%

4.50%

Market implies 26% chance of hike.

CHF

8:15

Retail Sales (Real) (YoY) (SEP)

0.1%

Rose annually in last 9 months.

EUR

8:45

Italian PMI Manufacturing (OCT)

52.8

52.6

European services and manufacturing industries expanded at weakest pace in a year in October.

EUR

8:50

French PMI Manufacturing (OCT F)

55.2

55.2

EUR

8:55

German PMI Manufacturing (OCT F)

56.1

56.1

EUR

9:00

Euro-Zone PMI Manufacturing (OCT F)

54.1

54.1

GBP

9:30

Purchasing Manager Index Construction (OCT)

53.0

53.8

Rose in Sept. after 3-month decline.

EUR

17:00

Italian New Car Registrations (YoY) (OCT)

-18.9%

Fell annually in last six months.

EUR

19:00

Italian Budget Balance (euros) (OCT)

-12.7B

Italian YTD budget deficit is 8 billion euros smaller than one year ago.

EUR

19:00

Italian Budget Balance (euros) (YTD) (OCT)

-64.5B

USD

21:00

ABC Consumer Confidence (OCT 31)

-47

-47

Confidence fell in last two weeks.

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE – 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4500

1.6375

89.00

1.0460

1.0922

1.0100

0.8230

127.60

146.05

Resist 1

1.4000

1.6100

86.00

0.9950

1.0750

1.0000

0.7925

120.00

140.00

Spot

1.3887

1.6039

80.59

0.9926

1.0171

0.9852

0.7654

111.92

129.26

Support 1

1.3685

1.5500

80.00

0.9500

0.9950

0.9100

0.6850

103.80

125.00

Support 2

1.3500

1.5300

75.00

0.9000

0.9700

0.8100

0.6585

100.00

119.00

CLASSIC SUPPORT AND RESISTANCE –EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

14.4500

1.6755

8.7915

7.8165

1.4945

Resist 2

7.7500

5.7800

6.2750

Resist 1

13.8500

1.4865

8.3675

7.8075

1.4655

Resist 1

7.5800

5.5400

6.1150

Spot

12.3507

1.4263

6.9858

7.7521

1.2920

Spot

6.7057

5.3697

5.8756

Support 1

12.0500

1.4070

6.6950

7.7490

1.2900

Support 1

6.4500

5.3000

5.7030

Support 2

11.7200

1.3665

6.4300

7.7450

1.2500

Support 2

6.1250

5.1000

5.5200

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4068

1.6138

81.93

1.0063

1.0243

0.9960

0.7719

113.77

131.01

Resist 1

1.3977

1.6088

81.26

0.9994

1.0207

0.9906

0.7686

112.85

130.13

Pivot

1.3921

1.6041

80.74

0.9904

1.0167

0.9861

0.7661

112.32

129.40

Support 1

1.3830

1.5991

80.07

0.9835

1.0131

0.9807

0.7628

111.40

128.52

Support 2

1.3774

1.5944

79.55

0.9745

1.0091

0.9762

0.7603

110.87

127.79

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

1.4090

1.6239

81.62

1.0064

1.0299

1.0013

0.7778

113.57

131.20

Resist. 2

1.4040

1.6189

81.36

1.0030

1.0267

0.9973

0.7747

113.15

130.71

Resist. 1

1.3989

1.6139

81.11

0.9995

1.0235

0.9933

0.7716

112.74

130.23

Spot

1.3887

1.6039

80.59

0.9926

1.0171

0.9852

0.7654

111.92

129.26

Support 1

1.3785

1.5939

80.07

0.9857

1.0107

0.9771

0.7592

111.10

128.29

Support 2

1.3734

1.5889

79.82

0.9822

1.0075

0.9731

0.7561

110.69

127.81

Support 3

1.3684

1.5839

79.56

0.9788

1.0043

0.9691

0.7530

110.27

127.32

v

Written by: John Kicklighter, Currency Strategist for DailyFX.com

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