Dollar Sees Two-Month Lows to End the Week, Looking Ahead to GDP and FOMC

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• Dollar Sees Two-Month Lows to End the Week, Looking Ahead to GDP and FOMC
• Euro Rallies Despite a Marked-Shift in Rate Potential and Bailout Conformity
• British Pound Traders Respond to a Drop in Retail Sales, Reserve Real Reaction for GDP
• Canadian Dollar Shows Little Meaningful Reaction to November Retail Sales Data
• New Zealand Dollar: What Should we Expect from the RBNZ Rate Decision?
• Australian Dollar Bulls Look for Strong 4Q CPI Next Week to Revive Rate Speculation

Dollar Sees Two-Month Lows to End the Week, Looking Ahead to GDP and FOMC

It wasn’t an encouraging level to end the week. The US dollar managed to hold its bearings against the commodity currencies; but it stumbled when measured against the other majors. Notably, GBPUSD fully retraced the bearish progress traced out following its nine-consecutive day advance; while both USDJPY and USDCHF gave up more than half their gains from Thursday. However, the worst of the damage was assessed with EURUSD. Looking to end the week with little question about its bearings, the benchmark currency pair surged for the third time this week to easily clear the 1.3450 to 1.2900 congestion pattern that has restrained price action for nearly two months. It is in itself remarkable that this pair was the one to make significant progress (bearish progress at that) given its liquidity and fundamental anchor. At the same time, the absence of an aggressive move in underlying themes means the dollar will remain wide open to a dramatic shift particularly a plunge in risk appetite.

In the meantime, fundamental offerings on the US docket Friday were not immediately market-moving. The 4Q earnings season found a big boost from a range of important reports. GE and Google carried the upper end of the spectrum; but systemically important Bank of America reported a miss. What’s more, with the New York Fed trying to force the company to take back 10’s of billions of dollars worth of bad mortgages, its five-fold increase in loan loss provisions to $4.1 billion means this is a serious concern on both sides. While we see a steady improvement in the home sales data; it is important to keep a close eye on the credit side of this sector as well. Trouble in this area could have far more dire consequences for the broader financial markets – much less housing. Another interesting, but under-the-radar, report to keep an eye on is building discussion about State bankruptcies. This would be similar in nature to EU members going bankrupt.

Looking ahead to next week, both risk appetite and the dollar are prone to seeing dramatic developments in trend. Pushing aside the Conference Board’s consumer confidence survey, housing price indicator and durable goods figures (all important but far from the top draws); the market will be focusing in on the FOMC rate decision and advanced reading of 4Q US GDP. The rate decision carries far less weight; but tone of the statement is always under review as yield traders gauge the willingness of the policy group to deviate from the maturity of its second round, $600 billion stimulus program. The growth reading will come with a far greater surprise factor. The economy is expected to have accelerated to a 3.5 percent annualized pace (on the back of a swell in personal consumption); which is very encouraging for the US in general. However, currency traders need to determine whether this in an indicator that will play more to relative performance expectations or risk appetite trends. The former would be more dollar bullish and latter dollar bearish. That said, amplifying optimism in the S&P 500 is difficult to do.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Whittling Exposure down to USDJPY and GBPJPY

Euro Rallies Despite a Marked-Shift in Rate Potential and Bailout Conformity

The positive bearings on the euro took a notably bearish shift through the final trading day of the week. As for the coordinated effort to solidify the financial picture in the Euro-area; the EU is reportedly considering a bond buy-back program whereby countries tapping the EFSF would be able to repurchase their own bonds at a discount. On the other hand, Fitch Ratings noted that the threat of downgrades in the Euro-region was continuing to rise; while German Chancellor Merkel’s government reiterated its line of share the bailout burden (this time to other EU members rather than bond holders). And as for the nascent rate hike call; the ECB’s January bulletin said short-term inflation my spike due to energy and food; but medium-term price growth would be in line with targets. Interestingly enough, top event risk may actually come at the start of the week. The PMI service and manufacturing sector reports are good, leading measures of both growth and market performance.

British Pound Traders Respond to a Drop in Retail Sales, Reserve Real Reaction for GDP

The sterling was surprisingly calm considering the data that crossed the wires. The BoE’s measure of mortgage approvals dropped to its lowest reading since March 2009 (40,000); but it was the record drop in retail sales that seemed most remarkable. A 0.8 percent drop in the headline figure was the biggest slump on records; but it was also offset by the fact that most traders expected a poor reading due to the inclement weather through December. Far more remarkable to the pound’s direction is the advanced 4Q GDP reading. With each quarter that passes, these broad growth reading grow increasingly important because market participants and policymakers will be interpreting it for the effects of the UK’s unprecedented austerity measures.

Canadian Dollar Shows Little Meaningful Reaction to November Retail Sales Data

Perhaps one of the most distinct reactions to scheduled event risk through the end of the week was the Canadian currency’s rally following its better-than-expected November retail sales report. The 1.3 percent advance was far greater than expected and the highest reading since March; but the gains initial found were quickly lost. Next week, we will speculate on interest rates with the December CPI reading seen at 2.5 percent.

New Zealand Dollar: What Should we Expect from the RBNZ Rate Decision?

Of the three major central bank decisions next week, the RBNZ has the greatest potential for surprise. This does not mean that Governor Bollard will move for a hike or cut; but he has the most flexibility when it comes to making monetary policy – and he has wielded that power cavalierly in the past. Realistically, we should be looking for any shifts in tone that increases or decreases the potential for hikes this year.

Australian Dollar Bulls Look for Strong 4Q CPI Next Week to Revive Rate Speculation

Keeping with the theme of monetary policy and interest rate speculation, the Australian dollar could see its flood-borne growth troubles offset by inflation pressure that forces the RBA’s hand. On take is the fourth quarter CPI figures; and the forecast of a 3.0 percent headline and 2.6 percent core reading could leverage the rate argument. However, a disappointment would go much further here.

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ECONOMIC DATA

Next 24 Hours

Currency	GMT	Release	Survey	Previous	Comments
AUD	0:30	Producer Price Index (QoQ) (4Q)	0.5%	1.3%	Australian producer prices in the third quarter rose by the most in almost 2 years.
AUD	0:30	Producer Price Index (YoY) (4Q)	3.2%	2.2%
JPY	5:00	Supermarket Sales (YoY) (DEC)		-0.5%	Declined annually in the last 24 months.
EUR	8:00	French Purchasing Manager Index Manufacturing (JAN P)	57.3	57.2	French PMI manufacturing fell last month from a 4-year high in November.
EUR	8:00	French Purchasing Manager Index Services (JAN P)	55.2	54.9
EUR	8:30	German Purchasing Manager Index Manufacturing (JAN A)	60.9	60.7	German manufacturing rose to a five-month high in December.
EUR	8:30	German Purchasing Manager Index Services (JAN A)	59.0	58.3
EUR	9:00	Euro-Zone Purchasing Manager Index Manufacturing (JAN A)	57.0	57.1	Europe’s services and manufacturing industries expanded faster than initially estimated in December, suggesting exports are boosting economic growth in the region.
EUR	9:00	Euro-Zone Purchasing Manager Index Services (JAN A)	54.3	54.2
EUR	9:00	Euro-Zone Purchasing Manager Index Composite (JAN A)	55.6	55.5
EUR	10:00	Euro-Zone Industrial New Orders s.a. (MoM) (NOV)	1.9%	1.4%	Industrial new orders rose annually by over 10 percent in the last nine months.
EUR	10:00	Euro-Zone Industrial New Orders (YoY) (NOV)	17.4%	14.8%
NZD	21:30	Performance of Services Index (DEC)		51.4	A reading higher than 50 shows expansion.
Currency	GMT	Upcoming Events & Speeches
NZD		New Zealand Market Closed For Wellington Anniversary
GBP	18:00	BoE's Andrew Sentance Speaks on Monetary Policy

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	1.3750	1.6420	89.00	1.0000	1.0922	1.0600	0.8230	127.60	146.05
Resist 1	1.3615	1.6034	86.00	0.9775	1.0750	1.0200	0.8000	120.00	140.00
Spot	1.3601	1.6002	82.61	0.9590	0.9948	0.9897	0.7571	112.36	132.19
Support 1	1.2900	1.5312	80.00	0.9300	0.9800	0.9600	0.6850	103.80	125.00
Support 2	1.2585	1.5186	75.00	0.9000	0.9700	0.9375	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	13.8500	1.6755	7.2790	7.8165	1.4945		Resist 2	7.7500	5.7800	6.2750
Resist 1	12.5000	1.5931	7.1750	7.8075	1.4655		Resist 1	7.5800	5.6625	6.1150
Spot	12.0580	1.5732	7.0522	7.7902	1.2832		Spot	6.5874	5.4804	5.8173
Support 1	11.7200	1.4724	6.4000	7.7490	1.2750		Support 1	6.4500	5.2625	5.7030
Support 2	11.4400	1.3475	5.9200	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	1.3708	1.6105	83.30	0.9731	1.0027	0.9964	0.7632	112.95	132.87
Resist 1	1.3654	1.6054	82.96	0.9660	0.9988	0.9931	0.7601	112.65	132.53
Pivot	1.3552	1.5960	82.74	0.9617	0.9948	0.9885	0.7564	112.15	132.01
Support 1	1.3498	1.5909	82.40	0.9546	0.9909	0.9852	0.7533	111.85	131.67
Support 2	1.3396	1.5815	82.18	0.9503	0.9869	0.9806	0.7496	111.35	131.15

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3781	1.6174	83.54	0.9705	1.0051	1.0032	0.7676	113.84	133.84
Resist. 2	1.3736	1.6131	83.31	0.9676	1.0025	0.9998	0.7650	113.47	133.43
Resist. 1	1.3691	1.6088	83.08	0.9647	0.9999	0.9964	0.7623	113.10	133.02
Spot	1.3601	1.6002	82.61	0.9590	0.9948	0.9897	0.7571	112.36	132.19
Support 1	1.3511	1.5916	82.14	0.9533	0.9897	0.9830	0.7519	111.62	131.36
Support 2	1.3466	1.5873	81.91	0.9504	0.9871	0.9796	0.7492	111.25	130.95
Support 3	1.3421	1.5830	81.68	0.9475	0.9845	0.9762	0.7466	110.88	130.54

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

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