•    Euro Traders Proving Far too Optimistic about Financial Assistance Prospects
•    British Pound Traders Look at the Probable Norm Beyond the Election
•    Japanese Yen Risk Appetite Drift can’t be Altered by Data but What About the BoJ?
•    Canadian Dollar Finally Gets its Fundamental Day in the Sun

Dollar Recoils in Anticipation of 1Q GDP or another Unforeseen Financial Shock
With underlying investor sentiment returning to an unqualified state of normal, the US dollar’s budding breakout to 12-month highs and potential trend revival lost momentum before it even really began. Traders should ask themselves whether this is a genuine reversion to the market’s true self or if this is just a temporary lull in the storm. More than likely, we are likely shifting between these two states. Restrained volatility and a quiet and unassuming buildup in speculative positioning has been the general pace the markets have taken since early February. With this current, fundamental concerns have largely been absorbed by the insatiable demand for yield. However, recent conditions have altered the speculative flow. The preponderance of sovereign debt risk, cooling economic expansion and the all-to-real threat of a European-born financial crisis have established too solid a foot hold to simply be ignored. Therefore, we are now in a transition period where speculative interest is starting to catch up to the fundamental reality. This is perhaps the reason that the Dow Jones Industrial Average has maintained its unshakable bias and the euro has not spiraled into panic selling. Yet, through it all, the dollar has continued to develop its own bullish (though choppy) progress. With relative growth and interest rate expectations developing in favor of the US, there is a risk-ready appeal to be made for a currency that is otherwise the favored safe haven.

When assessing the probability for the future, though, it is clear that the greenback will struggle to maintain (much less advance) its highs on the basis of relative return. Should sentiment improve, key currencies (most notably the euro and British pound) will quickly find themselves at oversold levels and will subsequently draw liquidity away from the world’s reserve money. On the other hand, should risk appetite finally correct, the dollar will shift up to the next gear as safe haven flows seek out liquidity and familiarity while simultaneously holding out for a reasonable level of return. The dollar can provide all this. What will the particular stressor be for such a critical shift in sentiment? The Greece crisis spreading to the rest of the European Union and then perhaps the world is the most immediate threat. However there are other dangers that must be accounted for. A tempering of growth for the global economy seems an inevitability. Yet, more important and seeming overlooked by the masses is the threat of overheated markets and the bursting of an asset bubble in China that could undermine the emerging market growth engine.

In the meantime, how will the United States’ own economic update elicit from the market? Will the advanced reading of the first quarter GDP report offer a temporary revival of risk appetite (with a better-than-expected reading) or could it finally tip the sentiment into a tailspin (with a sharper-than-predicted cooling)? Traditionally, the implications for the benchmark currency on this front would be pretty straightforward. However, given the fundamental developments of the dollar itself, this event risk could offer a boost the greenback regardless of its outcome. A strong number would likely play to the belief of a US recovery while a weak figure would spark the demand for safety. The consensus for the annualized growth rate is for a 3.3 percent; but a real assessment of health will be found in the personal consumption number.

Related: Discuss the US Dollar in the DailyFX Forum, Watch the US 1Q GDP Release Live!

Euro Traders Proving Far too Optimistic about Financial Assistance Prospects
It was stated early Thursday morning that the European Union was close to finalizing the rescue package that the group was developing with the International Monetary Fund (IMF). Where this effort began as a means to assist Greece from falling into default, conditions have certainly deteriorated beyond the 45 billion euro price tag that has been touted. And, while the funds will certainly help by preventing the acceleration of the weakened members’ collapse, the long-term effects of the extraordinary deficits, fragile economic recovery and the stringent EU rules means that something will have to give. Putting this into notional terms, the IMF has estimated Greece will need as much as 100 to 120 billion euros to find stable ground; and that figure doesn’t account for the high potential that Portugal, Spain, Ireland and perhaps even Italy will find themselves in similar situations down the line. Given all this, it is a fair assessment that the markets are underestimating the impact that this changing of the tides will have on the euro long-term. Yet, for the near-term speculative crowd, today’s drop in German unemployment (the biggest in two years) and the first positive reading in the Euro Zone economic confidence gauge (a reading above 100) offers a timely distraction in a lull. Tomorrow, the April CPI estimate and March unemployment rate could help fill in for the absence of a new financial shock.

British Pound Traders Look at the Probable Norm Beyond the Election
What will happen after the general election next week? Regardless of whether there is a majority or Parliament is set within political gridlock, the freeze of uncertainty will be lifted and the government will go back to balancing the economic crisis and ballooning debt load. With this sigh of relief, market participants will realize that there will be relatively little impact on the pace of recovery and the dreaded sovereign credit downgrade will still be a long-ways off. But, before we get to this point, we will see some fundamental pressure build. Today, the GfK consumer confidence gauge unexpectedly slipped while housing price growth accelerated to its fastest pace in nearly three years.

Japanese Yen Risk Appetite Drift can’t be Altered by Data but What About the BoJ?
Through the morning hours of Friday’s Asian session, the Japanese yen would wade through a glut of big ticket event risk. For a rounded view of activity, household spending grew at its fastest pace since May of 2004, the jobless rate ticked up to 4.0 percent and industrial production cooled to its slowest pace of growth in 13 months. However, for real impact, only the BoJ rate decision can nudge this funding currency.

Canadian Dollar Finally Gets its Fundamental Day in the Sun
The US growth number will draw the market’s attention Friday morning; but that does not mean we should overlook the February growth reading from Canada. The economy is backed by one of the strong growth and yield forecasts in the OECD; but much of this speculation has already been priced in. What is needed now is the tangible evidence to link expectations to reality.

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com

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