• Dollar Ends the Week on the Verge of Reversal as FX Policy, GDP and FOMC Decision Loom
  • British Pound Traders will Benchmark the Effect of Government’s Steep Spending Cuts on 3Q GDP
  • Euro Steps back from the Speculative Spotlight with Normal Economic and Financial Updates Scheduled
  • Japanese Yen: Will the BoJ Expand its Stimulus Program Even Further Next Week?
  • New Zealand Dollar May Report an Intense Reaction to RBNZ Even if Bollard Holds Rates
  • Canadian Dollar: August GDP Could Add Fundamental Momentum to a Dovish Yield Outlook

Dollar Ends the Week on the Verge of Reversal as FX Policy, GDP and FOMC Decision Loom

It was a quiet end to an otherwise active week for the dollar and broader capital markets Friday. Nonetheless, this bout of restrained activity does not alter the reality that volatility surged through the middle of the week and the steadfast advance in risk appetite since the beginning of September nearly collapsed. And, while speculatively-derived confidence has not yet caved; the correction has fundamentally shaken faith that capital markets can simply rise in perpetuity as fundamental conditions crumble around investors. In terms of market performance, if we look back over the past week, we can see that even though a reversal in sentiment and market benchmarks has not gained traction, there has been a certain deterioration in confidence. In the less complicated speculative markets, we can see this quite clearly in the remarkably staid congestion for the S&P 500 and US crude. Gold and currencies add a layer of complexity. The precious metal – considered an appealing alternative to risky assets and fiat exposure – ends the week on the verge of breaking its extraordinary bull run. And, the dollar finds itself in the position where it has broken selling momentum; but a serious recovery has yet to take root. It seems traders are waiting for the next fundamental cue.

Through the final 24 hours of this past trading week, the major themes were moved to the backburner. For risk appetite trends, the earnings season has already shown significant highs (Apple, Citi) and lows (Bank of America); but the general trend of earnings has not shown the corrosion that would be expected of the economic hardship that the world’s largest economy faces – conditions are bad enough that the central bank is considering expanding its stimulus efforts. This uncanny performance most likely traces back to the support offered by the government (most prominent for large banks and blue chip firms), deferred losses and foreign sales. Should sentiment sour, this is a component of the market that could easily turn from support to detriment. Another facet of risk appetite that is ultimately limited in nature is the promise of stimulus. Where the promise of stimulus had offered a cheap source of capital in its first iteration and has more recently offered an opportunity to jump in ahead of the clumsy rush of capital; this scenario has generally been priced at this point. That said, traders fully discounted Kansas City Fed President Hoenig’s suggestion that excess liquidity could have ‘very bad’ results and Dallas Fed President Fisher’s doubts that additional accommodation would have a meaningful impact the economy (though he did say officials should consider the side effects for the dollar).

Looking ahead to next week, the risk appetite and stimulus speculation will no doubt be present as credible topics; but their influence and catalysts will be warped somewhat. As for the threat of intervention, with the market already showing it has more or less accounted for a hearty expansion in its bond purchasing effort; a full schedule of speaking engagements for the Board of Governors will likely fall short of defining a new trend for the US dollar or investor optimism. Speaking of risk appetite, the earnings season will continue into the coming week; but the market has already assessed the situation. Instead, the docket will likely pick up the slack. There are a lot of top-tier economic indicators due for release; but the Friday 3Q GDP reading will certainly carry the most weight. That being said, a Friday release can actually act to dampen activity.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Holding my EURUSD and GBPUSD Shorts into a Busy Week

British Pound Traders will Benchmark the Effect of Government’s Steep Spending Cuts on 3Q GDP

The British pound has undergone a remarkable fundamental shift this past week; yet the market seems to be in a state of denial. With the government’s austere spending cuts and Chancellor Cameron’s suggestion that the Bank of England can fill in the gap for growth, we are presented with a situation whereby the economic recovery is likely to stall and the central bank will have to resort to policy easing. This is essentially the same situation that the US dollar is in; and yet, the sterling still maintains a significant premium over its US counterpart. Perhaps next week’s event risk will draw speculative interests to the fundamental light. At the top of a busy docket is the first reading of 3Q GDP. The consensus forecast already calls for a significant moderation from the previous period on a 0.4 percent increase through the period. Growth is already an important reading for the currency; but it is especially serious as a benchmark for the impact of fiscal rebalancing.

Euro Steps back from the Speculative Spotlight with Normal Economic and Financial Updates Scheduled

Whatever happened to the fear of a financial implosion in Europe? It went out of vogue as interest in US stimulus started to gain prominence. Out of the spot light, traders are free to react to encouraging updates. Through Friday, the German IFO business sentiment report advanced to its highest level in three-and-a-half years while ECB member Nowotny said the market should remain “relaxed” in deference to a high euro.

Japanese Yen: Will the BoJ Expand its Stimulus Program Even Further Next Week?

The Japanese haven’t seen much attention in the lead up to the G20 meeting, even though one of the key topics is currency manipulation and island nation is just one of a few major economies that have actively intervened. Despite this presence in the market though, the yen has not let up from its steadfast appreciation. This leads us to wonder whether the BoJ will consider further action at its policy meeting next week.

New Zealand Dollar May Report an Intense Reaction to RBNZ Even if Bollard Holds Rates

A steady approach on monetary policy is generally a common tactic for global central banks nowadays. However, for the RBNZ, a stay on rates eats into the perceived appeal of a weakened high-yield currency. The policy authority is scheduled to announce its policy decision on Wednesday; and the market sees no chance of a change. That said, the one-page report to accompany the decision will be broken down.

Canadian Dollar: August GDP Could Add Fundamental Momentum to a Dovish Yield Outlook

The potential for the Canadian dollar to raise its profile as a yield-bearing currency to match its commodity status has been completely gutted. That said, the loonie still maintains significant premium against the dollar, euro and British pound. Perhaps the August GDP reading will provide some clarity on where this currency stands on the risk spectrum. Expansion after the first contraction in 11 months would be encouraging.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

JPY

23:50

Merchandise Trade Balance Total (Yen) (SEP)

¥710.0B

¥86.0B

Japan’s export growth slowed for a fifth month in July, adding to risks in an economy already hurt by a surging yen.

JPY

23:50

Adjusted Merchandise Trade Balance (Yen) (SEP)

¥495.5B

¥589.7B

JPY

23:50

Merchandise Trade Exports (YoY) (SEP)

9.6

15.5

JPY

23:50

Merchandise Trade Imports (YoY) (SEP)

7.4

17.9

AUD

0:30

Producer Price Index (QoQ) (3Q)

0.5%

0.3%

Australian producer prices likely rose for a third straight quarter.

AUD

0:30

Producer Price Index (YoY) (3Q)

1.4%

1.0%

GBP

8:30

BBA Loans for House Purchase (SEP)

31000

31767

Fell to sixteen-month low in August.

EUR

9:00

Euro-Zone Industrial New Orders (YoY) (AUG)

19.3%

11.7%

European industrial orders fell more than forecast in July.

EUR

9:00

Euro-Zone Industrial New Orders (MoM) (AUG)

2.2%

-1.8%

USD

12:30

Chicago Fed Nat Activity Index (SEP)

-0.53

Negative reading in last four months.

USD

14:00

Existing Home Sales (SEP)

4.30M

4.13M

Existing home sales climbed last month from a record low in August.

USD

14:00

Existing Home Sales (MoM) (SEP)

4.1%

7.6%

USD

14:30

Dallas Fed Manufacturing Activity (OCT)

-8.0

-17.7

Negative reading in last four months.

Currency

GMT

Upcoming Events & Speeches

USD

12:00

Fed’s Christine Cumming to Speak in Brussels, Belgium

USD

12:30

Ben Bernanke To Speak on Mortgages and the Future of Housing Finance

USD

14:30

Fed’s William Dudley to Visit Business Site in Ithaca, NY

USD

17:30

Fed’s James Bullard Speaks on Financial Stability

USD

20:30

Fed’s William Dudley Speaks on The National and Regional Economy

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

1.6000

86.00

0.9950

1.0750

1.0000

0.7650

120.00

140.00

Spot

1.3928

1.5669

81.42

0.9784

1.0277

0.9806

0.7470

113.40

127.57

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

12.3593

1.4250

6.9485

7.7621

1.2976

Spot

6.6325

5.3547

5.8179

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

1.4033

1.5790

81.83

0.9894

1.0347

0.9902

0.7543

114.12

128.35

Resist 1

1.3981

1.5729

81.62

0.9839

1.0312

0.9854

0.7507

113.76

127.96

Pivot

1.3919

1.5691

81.31

0.9750

1.0268

0.9806

0.7472

113.18

127.53

Support 1

1.3867

1.5630

81.10

0.9695

1.0233

0.9758

0.7436

112.82

127.14

Support 2

1.3805

1.5592

80.79

0.9606

1.0189

0.9710

0.7401

112.24

126.71

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

1.4123

1.5857

82.43

0.9915

1.0407

0.9962

0.7589

115.06

129.46

Resist. 2

1.4074

1.5810

82.18

0.9882

1.0375

0.9923

0.7559

114.65

128.99

Resist. 1

1.4025

1.5763

81.92

0.9849

1.0342

0.9884

0.7529

114.23

128.52

Spot

1.3928

1.5669

81.42

0.9784

1.0277

0.9806

0.7470

113.40

127.57

Support 1

1.3831

1.5575

80.92

0.9719

1.0212

0.9728

0.7411

112.57

126.62

Support 2

1.3782

1.5528

80.66

0.9686

1.0179

0.9689

0.7381

112.15

126.15

Support 3

1.3733

1.5481

80.41

0.9653

1.0147

0.9650

0.7351

111.74

125.68

v

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

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