The Calm After The Storm: Little Change For The Dollar

The dollar was little changed overall this morning, with the DXY index almost exactly where it was when I wrote this comment yesterday. This implies to me that the markets are settling down after the turmoil caused by Wednesday’s FOMC minutes/Bernanke speech and rather than any broad USD move, we're going back to trading individual currencies on those currencies’ merits. Over time I think this trend will allow the dollar to make a comeback. Market reports said the US currency weakened following worse-than-expected jobless claims (both new and continuing claims were higher than expectations and higher than the previous week), but since the US currency actually peaked half an hour after that news came out I don’t see how it could have been responsible for weakening.

There were two significant moves overnight. On the one hand, AUD and NZD weakened as Australian home loans grew less than forecast in May. Concerns over Chinese growth are also weighing on AUD and NZD ahead of next week’s China GDP data. But CAD gained on hopes for continued US stimulus, demonstrating that location matters as well as classification as a “commodity” currency. The other move worth noting was in GBP, which was the best performing currency among the majors. Investors and analysts are starting to reconsider the likelihood that the new Bank of England Governor can overcome resistance on the Monetary Policy Committee to further quantitative easing. I expect that while an increase in outright purchases may not be possible, there are other measures that the central bank can take, as Mr. Carney himself has pointed out. I expect the Bank to implement such measures and for GBP to weaken as a result.

The major indicator out today is Eurozone industrial production for May. German IP was below expectations, but French and Italian IP modestly exceeded expectations so today’s Eurozone figure could go either way. The market consensus is for -0.3% mom vs +0.4% mom in April, which would tend to reinforce views of a weak Eurozone economy and thereby be EUR-negative. US producer prices for June later in the day are expected to have risen by 0.5% mom or +0.1% excluding food and energy, both the same as in the previous month. That might assuage fears of deflation that could delay QE tapering off and thereby weaken the dollar. U of Michigan consumer confidence for July is expected to rise to 84.7 from 84.1, which would also be USD-supportive. The Fed’s Plosser and Bullard speak at a panel discussion about the central bank. They may put yet another spin on the FOMC’s stance. The hawkish Mr. Plosser recently said the Fed should begin tapering off “now,” while the dovish Mr. Bullard dissented from the latest Fed decision because he is concerned that inflation may be too low.

Note: the “Big Picture” analysis is based on 7AM – 7 AM Cyprus time prices, whereas the following technical analysis is based on midnight-to-midnight prices. There may be some discrepancy with regards to intraday directioni as a result, although the outlook does not change.

The Market

EUR/USD
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• EUR/USD continued to move higher yesterday, being backed up by strong momentum indicators, and is likely to continue to rise further following Wednesday’s breakout. The pair however managed to keep only half of its gains yesterday, as during the second half of the day it corrected downwards, finding support at 1.3014.

• Resistance levels can be found at 1.3200 (yesterday’s high) and 1.3290, support at 1.3014 and 1.2890.

USD/JPY
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• USD/JPY continued to drop following the general USD selling, Though the longer term outlook on USD/JPY is bullish, it likely to see a further drop for the time being as the Stochastic Oscillator has left the oversold region. The pair at the point of writing is at the 99.00 key level.

• Resistance levels can be found around the 99.80-100.00 region and 100.70, support at 98.60 and 97.00.

AUD/USD
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• AUD/USD has seen significant volatility over the past four days but has been finishing the day flat at the 0.9170 region, putting the pair in a wait-and-see mode depending on which direction a break occurs. A breakout of 0.9300, yesterday’s high, may see a change in the overall downtrend being observed in the pair shooting it all the way to 0.9460.

• Resistance levels are 0.9290 and 0.9350, support at 0.9130 and 0.9070.

Gold

• Gold continued to make gains yesterday, then retraced half of its gains, and since then it has been consolidating around the 1283.00 area. Given its recent breakout it is likely for some further move to the upside as it has gone out of overbought region.

• Resistance levels can be found at 1297.75 with a breakout leading all the way to 1343, support at 1260 followed by 1226.50

Oil

• WTI’s up movement observed over the past days saw a significant drop yesterday after it failed to break above its top 4-Hour Bollinger Bands level. WTI maintains however an uptrend and it is likely for the drop observed to be over and the up-move to resume as in early trading hours it bounced off the 104.50 support, its middle Bollinger Bands.

• Resistance levels can be found at 107.40(yesterday, high), with a breakout leading all the way to 108.30, support at 103.40 followed by 101.70.

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