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Forex Market News

Australian Dollar Recovery May Resume After US-Linked Interlude

Fundamental Forecast for the Australian Dollar: Neutral

  • Jitters Ahead of Key US News Undermined Aussie Recovery Last Week
  • Fading RBA Rate Cut Bets, US GDP Revision May Reboot AUD Gains
  • Find Key Inflection Points for the Australian Dollar with DailyFX SSI

The Australian Dollar turned lower last week, breaking the win streak against its US counterpart established in early April. As we suspected, the move appeared to reflect repositioning ahead of the release of minutes from last month’s FOMC meeting and April’s CPI report.

Tellingly, supportive comments from RBA Deputy Governor Lowe as well as minutes from May’s RBA meeting failed to underpin the Aussie despite implying that the central bank is in no hurry to cut interest rates further. Meanwhile, the greenback launched a broad-based recovery against all of its top counterparts including AUD, presumably amid bargain-hunting after five consecutive weeks of losses on the off-chance that either FOMC rhetoric or a pop in price growth might fuel rebuilding Fed rate hike speculation.

As it happened, the greenback lost momentum once event risk passed. The Fed minutes’ explicit unwillingness to dismiss the June FOMC meeting as a possible time to raise rates sounded hawkish compared with priced-in market expectations pointing toward tightening late in the fourth quarter. Still, the markets cut short the greenback’s recovery once the coast cleared for continued profit-taking on pro-USD positions that began after speculative net-long exposure hit a record high in March.

The stock of formative event risk looks relatively thin in the week ahead. Australia’s data docket doesn’t seem to feature anything capable of meaningfully derailing the evolution of RBA policy bets, where the path of least resistance favors a shift from dovish end of the spectrum toward a more neutral setting. Similarly, a US calendar shortened by the Memorial Day holiday is populated with primarily second-tier releases.

A revised set of first-quarter US GDP figures expected to bring a sharp downward revision marks a break in the monotony. The report is expected to show that output shrank 0.9 percent in the first three months of the year, marking a stark contrast with the already sub-par 0.2 percent increase initially reported. While the BEA last week acknowledged a “residual seasonality” distortion that has produced unduly soft first-quarter GDP readings for some years, the admission won’t mean dismal readings boost Fed tightening (it will perhaps just limit negative fallout for USD).

On balance, this seems to suggest that after last week’s respite, the broad-based counter trend reversal playing out across the G10 FX space in the second quarter may resume. The Aussie is set to resume its recovery in such a scenario as the range of anti-USD majors retrace, waiting for Janet Yellen and company to signal the onset of stimulus withdrawal so explicitly as to reboot the benchmark currency’s long-term advance. The mid-June meeting still seems like the time to do so, but there is ample time left in the interim.

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USDJPY Stands at 2015 High With Fed and BoJ Policy in the Forefront

Fundamental Forecast for Euro:Neutral

  • USD/JPY Confluence Could Provide Support Near 120
  • Using FX Sentiment & Volume Analysis to Spot USDJPY Trend Resumption
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The near-term breakout in USD/JPY raises the risk for a run at the 2015 high (122.01), but the fundamental developments coming out of the world’s largest economy may undermine the bullish outlook surrounding the exchange rate should we see a growing number of Fed officials show a greater willingness to further delay the normalization cycle.

Speculation surrounding the Fed policy outlook may play an increased role in driving dollar-yen volatility as the Bank of Japan (BoJ) preserves a wait-and-see approach, and another series of dismal U.S. data prints may drag on interest expectations as the Federal Open Market Committee (FOMC) Minutes show a greater willingness to retain the zero-interest rate policy (ZIRP) beyond mid-2015. The preliminary 1Q U.S. Gross Domestic Product (GDP) report will be in focus going into the last full-week of May, and the updated print may dampen the appeal of the greenback as market participants anticipate a 0.9% contraction in the growth rate versus an initial forecast for a 0.2% expansion.

A marked downward revision in 1Q GDP may encourage the Fed to retain the ZIRP for an extended period of time, and we may see a growing number of central bank officials adopt a more dovish tone should the weakness from the beginning of the year carry into coming quarters. With FOMC voting-members Stanley Fischer, Jeffrey Lacker and John Williams scheduled to speak next week, the fresh batch of rhetoric may ultimately spur a near-term pullback in USD/JPY should the policymakers talk down bets for a September rate hike.

Nevertheless, the technical outlook highlights the risk for a test of the 2015 high as USD/JPY breaks out of the near-term range, and a more bullish formation may take shape in the days ahead should the U.S. developments highlight an improved outlook for the U.S. economy and beat market expectations.

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Talking Points:

USDOLLAR Rebounds on Sticky Core CPI- Growth Rate Adjustment in Focus.

EUR/USD Sits at Former Resistance- EU Summit on Tap.

Canadian Dollar to Face Bank of Canada (BoC), 1Q Gross Domestic Product (GDP) Report.

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USDOLLAR(Ticker: USDollar):

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

11869.95

11875.65

11774.14

0.57

143.18%

USDOLLAR Rebound Vulnerable to 1Q GDP ContractionUSDOLLAR Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • Dow Jones-FXCM U.S. Dollar advances to a fresh weekly high of 11,875 as the core Consumer Price Index (CPI) unexpectedly holds steady at an annualized 1.8% in April; may raise the argument the Fed will be able to achieve the 2% inflation target over the policy horizon.
  • Will keep a close eye on the fresh batch of Fed rhetoric, but the preliminary 1Q Gross Domestic Product (GDP) report may drag on the greenback as it’s expected to show a 0.9% contraction in the growth rate versus an initial forecast for a 0.2% expansion.
  • Close above the Fibonacci overlap around 11,826 (61.8% expansion) to 11.843 (38.2% retracement) may generate a run at former support around 11,898 (50% retracement) to 11,901 (78.6% expansion).

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USDOLLAR Rebound Vulnerable to 1Q GDP Contraction

Click Here for the DailyFX Calendar

EUR/USD

EUR/USD Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • EUR/USD remains at a risk for a further decline should we see an ongoing series of closes below 1.1120 (61.8% retracement);break/close below former-resistance around 1.0970 (38.2% expansion) to 1.0990 (50% retracement) to bring up next downside target at 1.0850 (78.6% expansion) to 1.0870 (38.2% expansion).
  • Will keep a close eye on the headlines coming out of the EU Summit as Greece struggles to achieve a near-term deal; greater threat for default/contagion to heighten the bearish sentiment surrounding the single-currency.
  • DailyFX Speculative Sentiment Index (SSI) shows retail crowd remains net-short EUR/USD since March 9, with the ratio stand at -1.29 going into the holiday weekend.

USD/CAD

USD/CAD Daily Chart

  • USD/CAD looks poised for a test of former support around 1.2360 (38.2% retracement) to 1.2380 (50% retracement) as the pair breaks out of the near-term range.
  • Despite the slowdown in Canada CPI, the pickup in Retail Sales may encourage the Bank of Canada (BoC) to endorse a wait-and-see approach at the May 27 policy meeting; will keep a close eye on the 1Q GDP report amid expectations for a marked slowdown from the last three-months of 2014.
  • Long-term outlook remains bullish for USD/CAD, but the topside may stay capped as the triangle/wedge pattern carried over from March remains in play.

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Read More:

USD/CAD, USD/JPY Seen as Most Resilient USD-Pairs

Crude Nearing Key Pivot

— Written by David Song, Currency Analyst

To contact David, e-mail [email protected] Follow me on Twitter at @DavidJSong.

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Talking Points:

– EURUSD, GBPUSD maintain uptrends after tests of supports.

– USDCAD, USDJPY maintain breakout levels after retests.

– See the May forex seasonality report.

The US Dollar is faring better against some currencies (AUD, CAD, JPY) rather than others, which have proven to be more resilient (EUR, GBP). Nevertheless, the bottoming potential in the USDOLLAR Index persists, pulling into focus today’s US inflation data as a potentially important catalyst.

See the above video for technical considerations in EURUSD, GBPUSD, USDJPY, USDCAD, and the USDOLLAR Index.

Read more: USD Selloff Post-FOMC Minutes May Not Last Long

— Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail [email protected]

Follow him on Twitter at @CVecchioFX

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Headline U.S. Consumer Price Index (CPI) to Contract for Second Straight Month- First Since 2009.

Core Rate of Inflation to Slow to Annualized 1.7%- First Downtick for 2015.

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Trading the News: U.S. Consumer Price Index (CPI)

A further contraction in the headline U.S. Consumer Price Index (CPI) may drag on the greenback and spur a near-term rebound in EUR/USD as it raises the Fed’ scope to further delay the normalization cycle.

What’s Expected:

EUR/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

The disinflationary environment may become a growing concern for the Fed as it struggles to achieve the 2% goal for price growth, and we may see a growing number of central bank officials look to preserve the zero-interest rate policy (ZIRP) for an extended period of time in an effort to encourage a stronger recovery.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

U. of Michigan Confidence (MAY P)

95.9

88.6

Advance Retail Sales (MoM) (APR)

0.2%

0.0%

Average Weekly Earnings (YoY) (APR)

2.3%

2.2%

Waning confidence paired with the ongoing weakness in household consumption may encourage U.S. firms to offer discounted prices, and a marked downtick in the CPI may generate a bearish reaction in the greenback as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Housing Start (MoM) (APR)

9.6%

20.2%

ISM Non-Manufacturing (APR)

56.2

57.8

Consumer Credit (MAR)

$15.800B

$20.523B

Nevertheless, the expansion in service-based activity along with the pickup in private-sector credit may encourage a sticky inflation print, and a positive development may boost the appeal of the reserve currency as the Fed remains on courses to normalize monetary policy in 2015.

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How To Trade This Event Risk(Video)

Bearish USD Trade: U.S. Headline & Core CPI Show Greater Risk for Disinflation

  • Need to see green, five-minute candle following the release to consider a long trade on EUR/USD.
  • If market reaction favors a bearish dollar trade, buy EUR/USD with two separate position.
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit.

Bullish USD Trade: Consumer Price Index Exceeds Market Forecast

  • Need red, five-minute candle to favor a short EUR/USD trade.
  • Implement same setup as the bearish dollar trade, just in reverse.

Potential Price Targets For The Release

EUR/USD Daily Chart

EUR/USD Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • Failure to retain the bullish formation in price & the Relative Strength Index (RSI) raises the risk for a further decline in EUR/USD.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, but continues to narrow going into the holiday weekend as it currently sits at -1.31.
  • Interim Resistance: 1.1520 (61.8% expansion) to 1.1532 (February high)
  • Interim Support: 1.0970 (38.2% expansion) to 1.1000 (50% retracement)

Read More:

USDOLLAR Daily RSI Sequence Serves as a Warning

GBP/USD Bullish Outlook to Gather Pace on Hawkish BoE Rhetoric

Impact that US CPI has had on EUR/USD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAR

2014

04/17/2015

12:30 GMT

0.0%

-0.1%

-64

-22

March 2015 U.S. Consumer Price Index

EUR/USD Chart

The U.S. Consumer Price Index (CPI) unexpectedly contracted an annualized 0.1% in March, while the core rate of inflation climbed to 1.8% amid forecasts for a 1.7% clip. Despite the ongoing weakness in the CPI, the stickiness in core price growth may keep the Fed on course to normalize monetary policy in 2015 as the central bank anticipates a stronger recovery to emerge in the coming months. The stickiness in the core CPI propped up the dollar, with EUR/USD slipping below the 1.0800 handle, but the greenback struggle to hold its ground throughout the day at the pair closed at 1.0799.

— Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail [email protected] Follow me on Twitter at @DavidJSong.

To be added to David’s e-mail distribution list, please follow this link.

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New to FX? Watch this Video

Join us to discuss the outlook for the major currencies on the DailyFXForums

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.

Talking Points:

  • Euro Unlikely to Yield Follow-Through on German IFO Survey Outcome
  • US Dollar May Decline Even if US CPI Data Tops Economists’ Forecasts
  • See Economic Data Directly on Your Charts with the DailyFX News App

The German IFO survey of business confidence headlines the economic calendar in European trading hours. The forward-looking Expectations index is expected edge lower for a second consecutive month, hitting the weakest level since February. The outcome is unlikely to drive significant Euro volatility considering its limited implications for near-term monetary policy. Indeed, as we expected, minutes from April’s ECB meeting showed policymakers saw no need to consider changing their current stance (contrary to speculation following comments from Governing Council member Benoit Coeure earlier in the week).

Later in the day, the spotlight turns to April’s US CPI report. Expectations call for a downtick on the year-on-year core inflation rate (from 1.8 to 1.7 percent) after three consecutive months of improvement. Leading survey data hints an upside surprise may be in the cards however. The latest PMI report from Markit Economics reveals that output prices in the service sector – the largest part of the overall economy – rose at the fastest rate in seven months in April.

While this may foreshadow a firmer CPI result, it is unclear that such an outcome would necessarily drive the US Dollar higher. The benchmark currency’s tepid response to relatively hawkish overtones in minutes from last month’s FOMC meeting released earlier in the week suggest it may be pre-disposed to continue the downward correction launched mid-April. That means the CPI release may amount to little more than the passing of event risk uncertainty that – absent a truly remarkable deviation from forecasts – clears a path for the USD selling to resume. The same may prove to be the case for comments from Fed Chair Janet Yellen due later in the day.

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Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

1:00

NZD

ANZ Consumer Confidence (MAY)

123.9

128.8

1:00

NZD

ANZ Consumer Confidence (MoM) (MAY)

-3.8%

3.4%

2:00

CNY

Conference Board Leading Index (APR)

322.2

318.6

2:49

JPY

BOJ Annual Rise in Monetary Base

¥80T

¥80T

¥80T

3:00

JPY

BOJ Policy Statement/Kuroda Press Conference

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:00

EUR

German GDP n.s.a (YoY) (1Q F)

1.1%

1.1%

Medium

6:00

EUR

German GDP w.d.a (YoY) (1Q F)

1.0%

1.0%

Medium

6:00

EUR

German GDP (QoQ) (1Q F)

0.3%

0.3%

Medium

6:00

EUR

German Capital Investment (1Q)

0.8%

1.2%

Low

6:00

EUR

German Construction Investment (1Q)

1.8%

2.1%

Low

6:00

EUR

German Domestic Demand (1Q)

0.7%

0.5%

Low

6:00

EUR

German Exports (1Q)

0.5%

1.3%

Low

6:00

EUR

German Government Spending (1Q0

0.2%

0.2%

Low

6:00

EUR

German Imports (1Q)

1.6%

1.0%

Low

6:00

EUR

German Private Consumption (1Q)

0.6%

0.8%

Low

8:00

EUR

German IFO Business Climate (May)

108.3

108.6

Medium

8:00

EUR

German IFO Current Assessment (MAY)

113.5

113.9

Medium

8:00

EUR

German IFO Expectations (MAY)

103.0

103.5

Medium

8:00

EUR

ECB’s Draghi Speaks in Sintra, Portugal

Low

8:30

GBP

Central Government NCR (APR)

22.2B

Low

8:30

GBP

PSNB ex Banking Groups (APR)

8.3B

7.4B

Low

8:30

GBP

Public Finances (APR)

19.4B

Low

8:30

GBP

Public Sector Borrowing (APR)

7.9B

6.7B

Low

9:45

GBP

BOE’s Shafik Speaks in London

Low

11:00

GBP

BOE’s Carney Speaks in Sintra, Portugal

Low

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EURUSD

1.0922

1.1023

1.1068

1.1124

1.1169

1.1225

1.1326

GBPUSD

1.5279

1.5454

1.5558

1.5629

1.5733

1.5804

1.5979

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Contact and follow Ilya on Twitter: @IlyaSpivak

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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