Dollar Sees Biggest Rally in 8 Months after FOMC Minutes

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  • Dollar Biggest Rally in 8 Months at 2 Year Highs after FOMC Minutes
  • British Pound Collapse Continues as BoE Reassures Bears
  • Euro: Will EUR/USD Resist the Risk Slump and Hold its Bull Trend?
  • Japanese Yen Tested by Sentiment, A Long Time Until Next Stimulus Event
  • New Zealand Dollar RBNZ Reaction Exaggerated by Carry Drop
  • Swiss Franc: What Will Signal the EURCHF Return to 1.2000?
  • Gold Ignores Currency War Threats, Plummets Below $1,600

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Dollar Biggest Rally in 8 Months at 2 Year Highs after FOMC Minutes

Have we seen a permanent shift in risk this past session? The S&P 500 – one of my favored benchmarks for sentiment as it incorporates stimulus – posted its biggest daily drop in three months; while the preferred safe haven Dow Jones FXCM Dollar (ticker = USDollar) leveraged its biggest rally in eight months as it soared to a fresh, two-year high. With these two standard bearers once again showing momentum in opposite directions, we have a flashing signal that standard ‘Risk trends’ may be stepping in as a primary fundamental driver.

Running down the list of ‘themes’ that have the weight to absorb the entire market and carry trends, investor sentiment is the most imposing – by a wide margin. To this point, though, we have been following the path of stimulus. Net support from central banks and governments the world over has proven a critical support for sentiment – some say a serious distortion – and the relative efforts between the world’s largest players has taken the reins on relative performance amongst the currency market’s most liquid currencies. This has proven the British pound’s bane in its 2013 collapse (more on that below), the yen’s spectacular tumble and the euro’s relative strength. And, as long as risk of heavy market swings and panicked deleveraging is curbed by the safety net of deep-pocketed policymakers; who wouldn’t try to frontrun that clumsy market flow?

Yet, the market’s peace has been threatened. Not only have US equities and the dollar responded to the call of a fear, we have seen yen crosses, high-yield bonds, commodities and sovereign debt all move like ‘risk assets’. Market-wide correlation to a single theme is one of the most convincing reads of commitment and trend there is. However, we must approach with caution. One day, a trend does not make. The S&P 500 is a good illustration. The index’s 1.2 percent purge was remarkable, but it occurred at a five-year high. Critical to building momentum behind this nascent trend is the fundamental catalyst to light the spark and further fuel to keep it fed.

Though there was some early volatility Wednesday, the Fed seemed to be the unifying element to the risk move. The meeting minutes from the FOMC’s last policy delivered what many stimulus addicts had long feared – an early warning that the quantitative easing build up has peaked and the world’s most effective market supporter (manipulator if you’re a skeptic) is ready to start withdrawing support. In the statement, the most disconcerting remarks were that a “number” of the FOMC members though tapering QE may become necessary; “many” were concerned about the risks of more QE; and “several” said they should be prepared to “vary” the past of stimulus. Curbing the endorphin-flood of stimulus is not a cold turkey move, much less a move to tighten; but it exposes expensive markets against troubled growth.

British Pound Collapse Continues as BoE Reassures Bears

The pound has already made incredible, self-defeating strides over the past month; but the currency’s collapse this past session certainly vaulted it above the yen for sharpest decline. Having plowed below a four-year rising trendline just this past week, GBPUSD still managed to one-up itself Wednesday with the biggest daily drop since December 28, 2011. Of course, the dollar’s own strength contributed to this move; but the sterling lit its own match. In the London session, there were two pieces of key event risk: the labor data and BoE minutes. Jobless claims for January dropped more than double what was expected. Yet, that didn’t even register with sterling traders who simply unloaded when it was reported that BoE Governor King and two other central bankers called for another 50 billion in stimulus. Though voted down, this growing consensus for proactive easing suggests the UK central bank will attempt to ‘catch up’ and has plenty of room to deflate the pound.

Euro: Will EUR/USD Resist the Risk Slump and Hold its Bull Trend?Like most other risk sensitive currency pairs, EURUSD fell this past session. However, the benchmark currency pair has yet to turn the prevailing bull trend that dates back to July. In a severe risk aversion move that spans the entire financial market, this pair will succumb just as any other asset would. On the other hand, if the situation isn’t as virulent as doomsdayers fear, the euro will be able to hold its own better than most. In the upcoming session we have February PMI figures – GDP proxies – for which the bar is set low. But, it’s Friday’s LTRO2 repayment I’m watching.

Japanese Yen Tested by Sentiment, A Long Time Until Next Stimulus Event

Things are getting hairy for Japanese officials. Their perfectly crafted effort of threats and actual policy adjustments to drive their currency down over 20 percent in the past five months is under attack. If risk aversion kicks in, the carry-heavy yen crosses will be overwhelmed. Intervention policy can’t hold back such an element influence - especially given the yen’s move and the time frame until the key April BoJ meet.

New Zealand Dollar RBNZ Reaction Exaggerated by Carry Drop

It was another case of fundamental leverage for the New Zealand dollar. Unfavorable risk winds later Wednesday, the day started off with a kiwi-specific hit when RBNZ Governor Wheeler revealed that he was not above threatening his currency into submission. His suggestion that he could intervene to hold the kiwi was far from a BoJ-like effort, but it is a serious threat from a currency that is wholly an investment currency.

Swiss Franc: What Will Signal the EURCHF Return to 1.2000?

What would it take to drive EURCHF back to 1.2000 and raise the ire of the Swiss National Bank? Would risk aversion alone bolster the franc, or would we need that sentiment erosion undermine the Euro-area’s financial security and revive the Euro-Swiss flight-to-safety flow? If the ECB caves to pressure for more stimulus, it would likely signal to FX traders that the elements are there for EURCHF to drop back to its floor.

Gold Ignores Currency War Threats, Plummets Below $1,600

We have heard South Korea’s income President vow to take preemptive action to offset the impact that yen’s depreciation has on exports and RBNZ Governor Wheeler threaten to cap the kiwi. But this further manipulation of exchange rates didn’t seem to boost the appeal of gold. Before the Fed indicated it could cut back on QE, gold was already on fire. Let’s see if demand for safety can help the metal off its eight-monthlows.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:35

CNY

MNI February Flash Business Sentiment Indicator

Chinese activity indicators are important as investors expect recovery from 2012 bottom

2:00

CNY

Conference Board China Leading Economic Index

7:00

CHF

Trade Balance (Swiss franc)

1.70B

0.9B

Had large seasonal fluctuations. SNB sees CHF will further weaken, thereby helping exports.

7:00

CHF

Exports (MoM)

0.3%

-1.5%

7:00

CHF

Imports (MoM)

5.5%

8:00

EUR

French Purchasing Manager Index Manufacturing

43.8

42.9

Both on a downtrend below 50 over 2012. Spending cuts and tax reform would cut deficit, yet industries may face challenges.

8:00

EUR

French Purchasing Manager Index Services

44.4

43.6

8:00

CHF

Money Supply M3 (YoY)

9.8%

Has increased more rapidly in the 4Q of 2012.

8:30

EUR

German Purchasing Manager Index Manufacturing

50.5

49.8

On 01/13, services PMI has outperformed manufacturing PMI.

8:30

EUR

German Purchasing Manager Index Services

55.5

55.7

9:00

EUR

Euro-Zone Purchasing Manager Index Manufacturing

48.5

47.9

All have remained below 50. Greece, Portugal and other debt laden peripheral countries have dragged on the Eurozone PMI.

9:00

EUR

Euro-Zone Purchasing Manager Index Services

49

48.6

9:00

EUR

Euro-Zone Purchasing Manager Index Composite

49

48.6

9:30

GBP

PSNB ex Interventions

-8.7B

15.4B

Public net borrowing excluding financial intervention has declined modestly in prior reading, as high borrowing threatens UK’s AAA ratings.

9:30

GBP

Public Finances (PSNCR) (Pounds)

-35.0B

1.3B

9:30

GBP

Public Sector Net Borrowing (Pounds)

-9.5B

13.2B

11:00

GBP

CBI Trends Total Orders

-15

-20

Has slightly declining since 2011.

11:00

GBP

CBI Trends Selling Prices

15

21

Has surged since 07/12, the most steady uptrend in 2 yrs.

13:30

USD

Consumer Price Index (MoM)

0.1%

0.0%

Tempered inflation figures will not accelerate the Fed’s shift towards curbing QE

13:30

USD

Consumer Price Index (YoY)

1.6%

1.7%

13:30

USD

Consumer Price Index Ex Food & Energy (YoY)

1.8%

1.9%

13:30

USD

Initial Jobless Claims

355K

341K

Jobless claims trends have deviated from NFPs bearing

13:30

USD

Continuing Claims

3150K

3114K

15:00

USD

Philadelphia Fed.

1

-5.8

Regional activity indicator struggles to revive manufacturing as positive GDP attribute

15:00

USD

Existing Home Sales (MoM)

-0.8%

-1.0%

Single family home housing starts hit a four-year high, but existing home pool sales far more key

15:00

USD

Existing Home Sales

4.90M

4.94M

15:00

USD

Leading Indicators

0.2%

0.5%

Lower growth potential fits global trend, but pace of downward pitch important to risk trends and stimulus effort

16:00

USD

DOE U.S. Crude Oil Inventories

560K

GMT

Currency

Upcoming Events & Speeches

-:-

EUR

Italy’s Monti, Berlusconi and Bersani in TV Debate

17:30

USD

Fed's Bullard Speaks About Monetary Policy in New York

18:00

USD

Fed's Williams Speaks on Monetary Policy in New York

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

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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

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.7359

1.7859

8.9056

7.7558

1.2409

Spot

6.3546

5.6242

5.6090

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

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

1.3378

1.5349

94.60

0.9373

1.0255

1.0324

0.8429

125.80

143.97

Resist. 2

1.3349

1.5315

94.31

0.9353

1.0237

1.0302

0.8407

125.33

143.51

Resist. 1

1.3321

1.5280

94.02

0.9333

1.0220

1.0280

0.8386

124.87

143.05

Spot

1.3263

1.5210

93.45

0.9293

1.0184

1.0237

0.8342

123.94

142.14

Support 1

1.3205

1.5140

92.88

0.9253

1.0148

1.0194

0.8298

123.01

141.23

Support 2

1.3177

1.5105

92.59

0.9233

1.0131

1.0172

0.8277

122.55

140.77

Support 3

1.3148

1.5071

92.30

0.9213

1.0113

1.0150

0.8255

122.08

140.31

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at https://www.twitter.com/JohnKicklighter

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Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    0.9278-0.0009-0.10%
    AUDUSD=X
    0.5524-0.001-0.18%
    AUDGBP=X
    0.6709-0.0012-0.18%
    AUDEUR=X
  • Commodities
    Commodities
    NamePriceChange% Chg