The Japanese Yen continued to press higher amid risk aversion overnight but the sentiment-driven push may struggle to sustain momentum through the week-end.

Talking Points

• Yen Extends Gains on Asian Stocks Drop, Kuroda Commentary
• German IFO Survey May Prove to be a Non-Event for the Euro
• Dollar May Rise if Durables Data Boosts Fed QE Reduction Bets

The Japanese Yen continued to rally for a second day as risk aversion struck again on Asian stock exchanges after yesterday’s blood-letting, driving continued unwinding of carry trades funded in the perennially low-yielding currency. The MSCI Asia Pacific regional benchmark index slid as much as 1.7 percent. The Australian and New Zealand Dollars bore the brunt of risk aversion in the FX space, down as much as 1.0 and 0.6 percent respectively against their leading counterparts.

Comments from Bank of Japan Governor Haruhiko Kuroda helped underpin the Yen. The central bank chief said that while officials will continue to push toward ending deflation, the BOJ has announced sufficient monetary easing. That suggested policymakers were in no hurry to supplement their efforts in the near term, reinforcing what seems to be an emerging tendency toward profit-taking on short-Yen positions. Indeed, after months of speculation about the introduction of “Abenomics” and its subsequent implementation, investors may be hard-pressed to find further fundamental fuel for Yen selling in the near term.

The German IFO Survey of business confidence headlines the economic calendar in European hours. Economists expect the data to print unchanged from the prior month, offering no meaningful directional guidance to the Euro or wider risk appetite. While Eurozone economic news-flow has tended to underperform relative to consensus forecasts according to data compiled by Citigroup, the tepid response to yesterday’s PMI roundup hints the markets may have put the recession in the currency bloc on the backburner in the near-term as the spotlight remains on the Fed and Yen-related matters.

S&P 500 index futures are trading flat in early European session hours having recovered from earlier losses, casting doubt over the direction of risk sentiment ahead of the opening bell on Wall Street. The US Durable GoodsOrders report rounds scheduled event risk for the week, with expectations pointing to a mild 1.5 percent recovery in April following a sharp 6.9 percent drawdown in the prior month. A supportive outcome may reinforce bets on near-term reduction in Federal Reserve QE efforts, boosting the US Dollar.

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Asia Session:

Euro Session:

Critical Levels:

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

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THE TAKEAWAY: German IFO business climate survey beats expectations at 105.7 -> IFO’s Wahlrobe says he expects GDP to rise significantly in Q2 -> Euro rallies closer to 1.3000

The Euro rallied fifty points and rose closer to 1.3000 against the US Dollar, following the release of a better than expected German IFO survey and ensuing optimistic comments from the IFO. The IFO Survey of the business climate in May rose to 105.7, beating expectations for the survey result to remain at 104.4 for a second month. The IFO survey of current assessment rose to 110.0 from 107.2 in April, and the survey of expectations met expectations and remained at 101.6.

IFO’s Wohlrabe said after the release that he expects the German GDP to rise significantly in the second quarter when compared to the first quarter. Earlier today, the German economy was confirmed to have grown 0.1% in Q1, following the 0.7% GDP decline reported for Q4. The German GFK consumer confidence survey also rose more than expected to 6.5 for June.

The Euro is trading around 1.2980 against the US Dollar in Forex markets at the time of this writing. The pair may see resistance by the key 1.3000 figure, and support may continue to be provided around 1.2815.

The major comments from the European session came from the Bank of England’s Fisher. Fisher said the UK is starting to see a pickup, but the central bank must continue to support adjustments in the economy. He further said that evidence shows that QE is not becoming less effective. Although Fisher’s comments came off as dovish, he was one of the three MPC members who voted to add to stimulus in May, and therefore his comments did not significantly affect Pound trading.

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EURUSDDaily: May 24, 2013

Chart created by Benjamin Spier using Marketscope 2.0

– Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

• Dollar Fails to Break EUR/USD’s 1.2750 Support as Risk, QE3 Fears Steady
• Japanese Yen Surge Tracking – Not Leading – Nikkei 225 Tumble
• Euro Finds a Mixed Bag as PMI Figures Pick Up, Spanish Bond Demand Slows
• Australian Dollar Refuses to Jump Start Serious Recovery
• British Pound Slides after GDP Details Show Weak 1Q Triple Dip Miss
• New Zealand Dollar Slide Continues but Hardly Accelerates on Weak Trade Data
• Gold Establishes Range Below $1,400, Awaits Dollar’s Move

Dollar Fails to Break EUR/USD’s 1.2750 Support as Risk, QE3 Fears Steady

Stimulus will end…eventually. And, this realization sent a shudder through the market when both the FOMC minutes and Federal Reserve Chairman Bernanke noted that the central bank will likely temper QE3 in the coming months. Yet, how sensitive are the markets to this eventuality? If it was the mere recognition of the end to perpetual expansion of the Fed’s balance sheet that would spur speculators to abandon ship, we would have seen the S&P 500 build its sharp reversal Wednesday into a persistent trend and found the dollar driving EURUSD below 1.2750. Yet, neither critical escalation was realized this past session. The benchmark equity index closed its first back-to-back decline in five weeks; but it would also posts its biggest intraday, bullish recovery this year. Meanwhile, the combination of risk and money supply (the supply-and-demand aspect of balance sheet building) wouldn’t prevent the greenback from dropping against all of its major counterparts Thursday. Yet, despite the offsetting effort, neither investor sentiment nor dollar appetite are secure.

Though initially lost in the pang of fear Wednesday, both Bernanke and the minutes presented a case for maintaining the status quo at least through the immediate future. The central bank Chairman did suggest that a reduction in purchases may be in the cards over the coming months, but he also stated clearly that withdrawal too quickly could stall the recovery – an outcome any policy authority looks to avoid. Similarly with the transcript from the last FOMC gathering, the note of “some” members suggesting a tapering as early as June doesn’t overwhelm the “many” that said a downward shift in policy would require more progress. In a majority vote, the numbers are clear. Adding to sense of moderation the past session, St Louis Fed President Bullard reiterated his belief that the Fed isn’t “that close” to easing its support. Given these assumptions, the eventual taming of the QE3 stimulus program will depend heavily on the data over the coming weeks.

As ambiguous as the Fed is looking to be and hesitant as they are to make the first move to leveling off, a few additional months of $85 billion Treasury and MBS purchases won’t necessarily ensure risk appetite’s buoyancy. The divergence between exposure at these record market levels and the traditional fundamentals behind investing is extreme. Given the historical low in benchmark global rates, commitment to the highs in capital markets and carry necessitates arid volatility levels and steady capital gains (rising prices for buy-and-hold investors). It doesn’t take much for early profit taking to devolve into committed selling under these conditions. And, we don’t need a heavy-handed signal for that…

Japanese Yen Surge Tracking – Not Leading – Nikkei 225 Tumble

Volatility behind the yen, Nikkei 225 and 10-year Japanese Government Bond (JGB) yield has soared over the past 24 hours. And, what makes this particularly worrisome is that the increased turnover looks like it may be semi-permanent. In the wake of the Bank of Japan’s policy meeting where they announced a wait-and-see approach with their objective to increase the nation’s monetary base by ¥60-70 trillion, there is a distinctive risk that a dependence on constant escalation can scare the traders off. A steady appetite for JGBs, ETFs and J-REITs from the BoJ can keep the ship steady; but any troublesome weather will capsize carry trades that currently provide record low yields after having rallied 25 percent up from record lows. Doubt is already set in. The Nikkei 225’s attempt to retrace some of its incredible 1,110-pip loss Thursday has already fallen apart. Renewed selling through Friday’s session has pulled the benchmark index to a 10 percent drop from yesterday’s peak.

Euro Finds a Mixed Bag as PMI Figures Pick Up, Spanish Bond Demand Slows

The euro struggled to produce its own move. The currency’s biggest loss was found against the yen while its heartiest jump was won versus another safe haven – the dollar. The same split was noted between higher yielding currencies. From the euro docket, the regional PMI figures (treated as timely updates on growth trends) printed better than expected. The Eurozone Composite beat with a 47.7 reading, but it is important to remember that this is still a measure pointing to economic contraction. Meanwhile, the effort to take advantage of passive markets seems to be hitting a barrier. Spain recorded the first increase in yields and drop in demand in three months during a sale of 3, 5 and 13-year bonds.

Australian Dollar Refuses to Jump Start Serious RecoveryRisk trends made a bid to recover lost ground this past session, but the Australian dollar’s effort to ride this move’s coattails fell apart rather quickly. Furthermore, the highest benchmark-yield major never really gained traction against safe haven counterparts – indicating individual weakness beyond carry unwind. It is worth noting that the AUDUSD’s correlation to the S&P 500 is the most extreme, negative seen in nearly a decade. Meanwhile, open interest in Aussie government bond futures has advanced to 2008 highs – an indication of hedging losses?

British Pound Slides after GDP Details Show Weak 1Q Triple Dip Miss

The United Kingdom barely avoided the painful label of a triple dip recession, but the economy doesn’t seem to be seeing much of the recovery that truly matters. With the second reading of the 1Q GDP figures released this past session, we were given details on performance. Personal spending and government spending slowed, while exports and investment both actually contracted. A Triple Dip in spirit perhaps.

New Zealand Dollar Slide Continues but Hardly Accelerates on Weak Trade Data

Trade is New Zealand’s bread and butter growth-wise, but there was little strength to be found in the April figures that crossed the wires this morning. The trade balance figures for last month printed NZ$157 million – the biggest miss of the consensus forecast in years and a reversal from the two-year high from the previous month. Despite the negative implications, the kiwi’s controlled decent held retrained.

Gold Establishes Range Below $1,400, Awaits Dollar’s Move

A 1.5 percent rally from gold sounds good on paper, but a quick look at the charts shows us that the move was hardly productive. Once again, we are faced with a well-defined bout of congestion below $1,400 that will likely ward off any casual trending. The metal needs a dedicated drive that spurs commitment. Given that the Fed seems on the path of an eventual tempering of policy while the BoJ has hit its near-term limit, the catalyst for a bid on $1,800 seems out of reach. In the meantime, a dollar-borne selloff for the metal simply requires risk aversion.

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

ECONOMIC DATA

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

CLASSIC SUPPORT AND RESISTANCE

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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

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Trading the News: U.S. Durable Goods Orders

What’s Expected:

Time of release: 05/24/2013 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: 1.5%

Previous: -5.7%

DailyFX Forecast: 1.0% to 2.5%

Why Is This Event Important:

Orders for U.S. Durable Goods are expected to increase 1.5% in April and greater demands for large-ticket items should increase the appeal of the dollar as private sector consumption remains one of the leading drivers of growth. As a growing number of Fed officials turn increasingly upbeat toward the economy, it seems as though the FOMC will scale back on quantitative easing in the second-half of the year, and the committee may start to lay out a more detailed exit strategy in the coming months as the region gets on a more sustainable path.

Recent Economic Developments

The Upside

The Downside

The rebound in consumer sentiment paired with the resilience in household spending certainly bodes well for U.S. durable goods, and a positive development may further dampen expectations for more QE as the outlook for growth improves. However, subdued wage growth along with the slowdown in private sector credit may drag on demands for large-ticket items, and the FOMC may keep the door open to expand its asset purchase program beyond the $85/month target in an effort to encourage a stronger recovery.

Potential Price Targets For The Release

The head-and-shoulders formation in the EURUSD should continue to take shape as it carves out a lower top in May, and the pair looks poised for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50 as the fundamental outlook for the U.S. economy improves. However, a dismal durable goods report may spark another test of the 38.2% retracement (1.3120), and we may see the bearish pattern fail to pan out should the developments coming out of the U.S. renew bets for additional monetary support.

How To Trade This Event Risk

Forecasts for a rebound in durable goods certainly casts a bullish outlook for the greenback, and a positive development may pave the way for a long U.S. dollar trade as it raises the scope for faster growth. Therefore, if orders increase 1.5% or greater in April, we will need a red, five-minute candle following the release to establish a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade hits its mark in an effort to lock-in our gains.

In contrast, demands for U.S. durable goods may taper off amid the persistent slack in the real economy, and a dismal print may drag on the greenback as the data fuels bets for more QE. As a result, if the report falls short of market expectations, we will carry out the same setup for a long euro-dollar trade as the short position mentioned above, just in the opposite direction.

Impact that the U.S. Durable Goods Orders report has had on USD during the last month

March 2013 U.S. Durable Goods Orders

Demands for U.S. durable goods tumbled 5.7% in March after expanding a revised 6.4% the month prior, while orders for Non-Defense Capital Goods excluding Aircrafts, a proxy for business investments, increased 0.2% during the same period amid forecasts for a 0.3% rise. Despite the weaker-than-expected print, the EURUSD edged lower following the release, but we saw the U.S. dollar struggle to hold its ground during the North American trade as the pair ended the day at 1.3014.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

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Chart – Created Using FXCM Marketscope 2.0

Although the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.52 percent lower from the open, we’re seeing the 30-minute relative strength index come off of oversold territory, and the greenback may track higher during the North American trade as the drop in initial/continuing jobless claims paired with the 2.3 percent rise in New Home Sales instills an improved outlook for the world’s largest economy. In turn, we should see a small rebound going into the end of the week, but the pullback from 10,876 may turn into a more meaningful correction as former trendline support appears to be acting as new resistance. Nevertheless, the bullish sentiment surrounding the reserve currency should gather pace over the near to medium-term amid the ongoing improvement in the world’s largest economy.

Despite the fresh 2013 high in the USDOLLAR, we’re seeing the relative strength index persistently come off of resistance (78), and the greenback remains poised for a larger correction as the oscillator falls back from overbought territory. However, the shift in the Fed’s policy outlook should limit the downside for the reserve currency, and we will be looking for a higher low in the index as we anticipate the bullish sentiment surrounding the dollar to get carried into the second-half of the year. Indeed, St. Louis Fed President James Bullard, who also serves on the FOMC this year, added to the discussion of scaling back on quantitative easing and said the committee is more like to taper its asset purchases than expand the non-standard measure, and argued that the central bank should become a too big of a player in Mortgage-Backed Securities (MBS) as he sees the economy expanding 3.0 percent this year.

The greenback weakened across the board, led by a 1.48 percent rally in the Japanese Yen, but the near-term correction in the USDJPY should produce a higher low in the exchange rate as the upward trend from earlier this year continues to take shape. Indeed, the pullback from 103.72 may gather pace in the days ahead as the Bank of Japan (BoJ) moves to the sidelines, but the deviation in the policy outlook should produce fresh highs in the dollar-yen as Governor Haruhiko Kuroda pledges to retain an aggressive approach in achieving the 2 percent target for inflation. In turn, the pullback in the USDJPY may offer a buying opportunity in June, and we should continue to see a series of higher highs and higher lows in the exchange rate as the BoJ remains poised to further embark on its easing cycle in the second-half of the year.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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Talking Points

• Euro: PMI Contracts at Slower Pace, More ECB Easing Ahead
• British Pound: U.K. 1Q GDP Expands 0.3%, BoE to Target Inflation
• U.S. Dollar: Jobless Claims Tops Forecast- House Prices, New Home Sales on Tap

Euro: PMI Contracts at Slower Pace, More ECB Easing Ahead

The Euro advanced to an overnight high of 1.2903 as the purchasing manager index showed manufacturing and service-based activity in Europe contracting at a slower pace in May, but the rebound in the single currency is likely to be short-lived as the region remains mired in recession.

European Central Bank board member Peter Praet said the board is looking ‘at all possibilities’ to shore up the ailing economy as the region struggles to return to growth, while Governing Council member Christian Noyer noted that the central bank is looking to introduce ‘monetary policy instruments that could further reduce fragmentation’ across the monetary union as the governments operating under the single currency struggle to get their house in order.

At the same time, ECB board member Ewald Nowotny warned that there’s little ‘indication that there will be a significant improvement in the economic situation in the short term,’ and warned that ‘we may see worse numbers in the course of the year’ as he sees the economy contracting in 2013.

As a growing number of Governing Council officials turn increasingly cautious on the economy, we should see the ECB push the benchmark interest rate to a fresh record-low in the second-half of the year, and it seems as though the central bank will also introduce more non-standard measures in the coming months in an effort to boost private sector lending.

As the EURUSD retains the range-bound price action from earlier this week, the pair should continue to carve a lower top going into the final days of May, and we should see the head-and-shoulders pattern continue to take shape in June as the ECB retains a dovish tone for monetary policy. In turn, we are still looking for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, and we may see the EURUSD fail to maintain the rebound from July (1.2041) as European policy makers struggle to address the risks surrounding the region.

British Pound: U.K. 1Q GDP Expands 0.3%, BoE to Target Inflation

The British Pound pared the sharp decline from earlier this week, with the GBPUSD climbing to a high of 1.5093, and the sterling may continue track higher in the days ahead as the fundamental developments coming out of the U.K. dampens speculation for more quantitative easing.

Indeed, the preliminary GDP reading showed the U.K. economy expanding 0.3% in the first quarter, with private sector consumption advancing 0.1%, and it seems as though the Bank of England (BoE) is slowly moving away from its easing cycle as the region skirts a triple-dip recession.

Although the Monetary Policy Committee has ‘had a hard time rebalancing’ the economy, BoE board member Ben Broadbent said that the central bank is focus on achieving the 2% target for inflation, and we may see a growing number of BoE officials scale back their willingness to expand the balance sheet further as price growth is expected to accelerate throughout the course of the year.

As the GBPUSD continues to give back the rebound from back in March (1.4830), we may see the pair develop a broader downward trend in the days ahead, but an upward revision in the preliminary 1Q GDP report may prop up the sterling over the next 24-hours of trading as it dampens bets for more QE.As a result, we may see the GBPUSD carve out a higher low ahead of the next BoE interest rate decision on June 6, and the sterling may outperform against its major counterparts in the second-half of 2013 amid the shift in the policy outlook.

U.S. Dollar: Jobless Claims Tops Forecast- House Prices, New Home Sales on Tap

The greenback lost ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)slipping to a low of 10,784, but the reserve currency may track higher during the North American trade as the economic docket is expected to instill an improved outlook for the U.K.

Indeed, U.S. initial and continuing claims both beat market expectations amid the ongoing improvement in employment, and the budding recovery in the housing market may further increase the appeal of greenback as home prices are expected to increase another 0.8% in March, while New Home Sales are projected to rise 1.9% in April.

FX Upcoming

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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