DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.40 percent higher from the open after moving 104 percent of its average true range, and the shift away from risk-taking behavior should prop up the reserve currency as renewed fears of a Greek default drags on trader sentiment. However, as the 30-minute relative strength index falls back from a high of 72, it looks as though there will be a short-term correction before another move to the upside, and we will be closely watching the upward trending channel from earlier this year as the index struggles to push above 9,900. In turn, the USDOLLAR may fall back towards the lower Bollinger Band (9,839) going into the end of the week, but we maintain a bullish outlook for the greenback as the recovery in the world’s largest economy continues to gather pace.

Although the existing home sales report for January struck a mixed outlook for the housing market, the more robust recovery in employment paired with the ongoing expansion in production should help to encourage a stronger recovery, and we expect the Fed to further soften its dovish tone for monetary policy as the outlook for growth and inflation improves. As we’re expecting to see a slew of positive developments coming out of the U.S. economy, the data should curb speculation for another large-scale asset purchase program, but the event risks could fuel risk-taking behavior, which would dampen the appeal of the USD. Nevertheless, we will be watching for a close above the 50-Day SMA (9,884) to reinforce our bullish forecast for the dollar, and we may see the index make another run at the 78.6 percent Fibonacci retracement (10,118) as the Fed comes closer to concluding its easing cycle.

The greenback advanced against three of its four components, led by the 0.70 percent decline in the Japanese Yen, and the bearish sentiment underlining the low-yielding currency may gather pace over the near-term as the fundamental outlook for the world’s third-largest economy deteriorates. Indeed, the widening spread between U.S. and Japanese bonds has fueled the recent rally in the USDJPY, and the pair looks poised to appreciate further during the first-half of 2012 as the Bank of Japan expands its easing cycle. As Japanese policy makers scramble to stem the risk for deflation, the BoJ may continue to ramp up its asset purchases over the coming months, but the weakening outlook for the region is likely to produce headwinds for the Yen as market participants see the central bank maintaining the highly accommodative policy for a prolonged period of time.

— Written by David Song, Currency Analyst

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

To be added to David’s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

Join us to discuss the outlook for the major currencies on the DailyFX Forums

Fundamental Headlines

- Greek Bailout Wins Two Cheers from Wary Investors – Bloomberg

- Obama Readies Plan to Cut Corporate Tax Rate – Bloomberg

- Iran Defiant as U.N. Nuclear Talks Fail – Reuters

- Fitch Downgrades Greece – WSJ

- Despite Pact, Unease Lingers for Greece – WSJ

European Session Summary

The move to risk-aversion continues, even as the EURUSD has steadied following the second Greek bailout yesterday. Indeed, higher yielding currencies and risk-correlated assets have continued to weaken this week, with the commodity currencies posting a second day of losses. Price action to the downside today has been capped by better than expected data out of China and better than expected industrial data from the Euro-zone.

However, despite two “better” data prints, data elsewhere and developments out of Greece have tempered market enthusiasm of a continued rally. Manufacturing and service surveys from France, Germany, and the broader Euro-zone all disappointed to the downside, lending to the notion that the Euro-zone is headed for a recession. I continue to maintain this bias, and believe that the sovereign debt crisis, which has seen severe austerity measures implemented across the Euro-zone, will only exacerbate the downturn across the continent.

In regards to Greece, Fitch Ratings cut the country’s long-term sovereign debt rating to C from CCC. Fitch noted that the new rating indicates “that default is highly likely in the near-term.” This is, of course, unsurprising and expected, considered the measures set forth by Euro-zone leaders to solve the debt crisis – adding more debt to an already overbearing debt burden – will only make matters worse. Although there was little reaction following the downgrade, it only will increase speculation that other rating agencies will follow suit, adding evidence that a Greek default will be detrimental to market sentiment, ultimately raising questions about the viability of the debt-reduction measures implemented in other periphery nations.

GBPUSD 5-min Chart: February 22, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

Overall, the Swiss Franc was the top performing currency on the day, posting a meager 0.07 percent gain against the U.S. Dollar. Aside from the Franc, the Euro and the U.S. Dollar were the next best performers, with the EURUSD flat on the day. The British Pound has been the worst performing currency thus far, posting a 0.79 percent decline against the Greenback following the Monetary Policy Committee’s minutes this morning, which suggested that some additional easing by the Bank of England may be coming in the future.

24-Hour Price Action

Key Levels: 14:10 GMT

Thus far, on Wednesday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 9887.42 at the time this report was written, after opening at 9843.12. The index has traded mostly higher, with the high at 9894.11 and the low at 9834.68. This is only the index’s third advance of two days or more this year.

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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Gold and silver started off the week with very sharp gains. Yesterday’s gains were the sharpest this month (so far), which only goes to show how February is much less volatile than January.. Today, Euro Area Manufacturing PMI report will be published along with the Minutes of the last MPC Meeting, and the U.S. Existing Home Sales.

See here for the complete report on gold and silver daily setup.

Gold sharply increased by 1.89% to $1,758.5; silver also rose by 3.66% to $34.50. During February, gold rose by 1% and silver by 3.72%.

The ratio between gold and silver sharply decreased on Tuesday, February 20th at 50.97. During February the ratio slightly declined by 2.59% as silver has moderately outperformed gold.

On Today’s Agenda

U.S. Existing Home Sales: in the previous report regarding December the number of homes sold rose by 5% to a seasonally adjusted annual rate of 4.61 million home sales (see here the recent review);

Euro Area Manufacturing PMI (January 2012): In the recent flash report regarding January 2012, the Euro Zone Manufacturing PMI changed direction and reached 50.4 – a move toward the positive for the first time in five months. This report will provide an indicator to the economic development of the Euro zone’s manufacturing conditions;

Forex / Gold & Silver– February

Yesterday, the AUD and CAD also depreciated against the U.S. dollar by 0.86% and 0.34%, respectively. The correlation between AUD, CAD and metals is still strong. Therefore, if the AUD and CAD will continue resume their upward trend; it could indicate that precious metals will also trade up.

Daily Outlook

Gold and silver started off the week with very sharp gains; this rally might be related to the recent development in Europe regarding the approval of the Greek bailout package and the effect it had on the Euro and other currencies on Monday when the market had anticipated this news. The upcoming reports regarding the U.S. home sales and EU manufacturing PMI might affect the direction of gold and silver via their relation with USD and Euro.

For further reading:

Weekly Outlook for 20-24 February

By: Lior Cohen, M.A. in Economics, Commodities Analyst and Blogger at Trading NRG

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

Talking Points

• Euro: Fitch Cuts Greece’s Credit Rating, Sees Default In ‘Near Term’
• British Pound: U.K. Posts Budget Surplus, Remains Capped By 200-Day SMA
• U.S. Dollar: Index To Consolidate, Fundaments To Improve Further

Euro: Fitch Cuts Greece’s Credit Rating, Sees Default In ‘Near Term’

The Euro fell back from an overnight high of 1.3263 as Fitch lowered Greece’s credit rating to C from CCC, and warned that a default is ‘highly likely in the near term’ as the group plans to categorize the region’s debt as a ‘Restricted Default’ once the government concludes the PSI deal. At the same time, Germany talked down speculation of increasing the bailout fund at the March Summit, stating that there’s no need to increase the scope of the European Stability Mechanism, and argued against setting precedence for the periphery countries as Greece remains a ‘singular case in terms of the depth of its problems.’

Indeed, mounting threats of a Greek default reinforces a bearish outlook for the Euro, and the single currency looks poised to give back the advance from earlier this year as the fundamental outlook for the region turns increasingly bleak. As the EUR/USD remains capped by the 100-Day SMA (1.3310), the pair appears to be putting in a lower top ahead of March, but we would like to see the pair close below the 50-Day SMA (1.3022) to set the stage for another test of the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50.

British Pound: BoE Votes 7-2, Sideways Price Action Ahead

The British Pound tumbled to an overnight low of 1.5660 as the Bank of England Minutes spurred speculation for more quantitative easing, but the GBP/USD may continue to track sideways over the near-term as it maintains the range from earlier this month. Indeed, the Monetary Policy Committee voted 7-2 to expand the asset purchase program to GBP 325B, while Adam Posen and David Miles pushed for a GBP 75B increase amid the risk of undershooting the 2% target for inflation. However, we saw the BoE continue to soften its dovish tone for monetary policy as central bank officials expect to see a more robust recovery in 2012, and we may see a growing rift within the MPC as policy makers argue against sending the wrong message about the U.K. economy. Although the GBP/USD sold off following the announcement, we expect to see a short-term correction in the exchange rate as the it continues to hold above the 50-Day SMA (1.5617), and the pair may continue to trend sideways over the near-term as it remains capped by the 200-Day SMA at 1.5914.

U.S. Dollar: Index Hits Fresh Monthly High, Existing Homes Sales On Tap

The greenback continued to appreciate on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) climbing to a fresh monthly high of 9,893, and the reserve currency may continue to retrace the decline from earlier this year as the flight to safety gathers pace. However, as we’re expecting to see U.S. existing home sales increase another 1.1% in January, the ongoing improvement in the housing market could spur a shift in risk-taking behavior, and an above-forecast print could lift trader sentiment as it raises the outlook for future growth. Nevertheless, the more robust recovery in the world’s largest economy will continue to limit the Fed’s scope to push through another large-scale asset purchase program, and market dynamics may change throughout the course of the year should the FOMC continue to soften its dovish tone for monetary policy.

— Written by David Song, Currency Analyst

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

To be added to David‘s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

Will the EUR/USD Resume the Downward Trend From 2011? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Talking Points

• Crude Oil Likely to Remain Well-Supported on Iran-Linked Tensions
• Gold, Silver Buoyed by Inflation Bets But US Dollar Gains May Weigh
• Copper Vulnerable as S&P 500 Futures Point Toward Risk Aversion

Tensions between Western powers and Iran continue to push crude oil prices higher, with the WTI contract touching the highest since May 2011 yesterday. Scanning recent developments, the situation remains volatile. While Tehran has at least delayed (if not cancelled) planned military exercises in the Strait of Hormuz initially slated for this week, it is conducting another set of war games meant to prepare to counter “all possible threats, especially to public, important and nuclear centers,” according to private intelligence firm Stratfor. The exercises are reportedly focusing on surface-to-air missile systems, anti-aircraft artillery, radar systems and warplanes.

This kind of display suggests Iran may be starting to legitimately expect an attack on its nuclear facilities in the near term and could be brandishing an appearance of readiness as a deterrent. While it’s next to impossible to meaningfully predict where the situation will go from here, it seems highly unlikely that tensions will be unwound quickly, meaning a significant geopolitical risk premium will continue to amplify crude prices for some time.

Gold and silver rose sharply yesterday as 3-year US inflation expectations (measured by “breakeven rates”, which are the difference between yields on nominal and inflation-adjusted Treasury bonds) rose to the highest in 9 months, stoking store-of-value demand for precious metals. The outlook for price growth in 3 years – significant because it marks the conclusion of the Fed’s stated period when rates will be held “exceptionally low” – has been marching steadily higher recently.

The move likely reflects US economic data’s broad tendency to surprise higher relative to expectations since October, hinting an accelerating recovery against a backdrop of ultra-loose monetary policy will let loose inflationary pressure. More of the same may be on tap today with US Existing Home Sales expected to print at a 20-month high in January. A stronger US Dollar may act as an offsetting factor however. The greenback rose in European trade as Eurozone PMI figures disappointed, weighing on risk appetite and stocking safe-haven demand for the benchmark currency. S&P 500 stock index futures are trading lower ahead of the opening bell on Wall Street, arguing for more of the same ahead.

Copper also shot higher yesterday after a deal on the second Greek bailout removed the uncertainty that prevented prices from fully capitalizing on a Chinese interest rate cut announced in the previous day. China is the world’s largest copper consumer, so an easing of monetary conditions there that may boost economic activity naturally bodes well for the cycle-sensitive metal. Headwinds from Eurozone PMI figures are being felt today however, and the weakness in US stock futures ahead of the opening bell suggests that will continue into North American trade.

WTI Crude Oil (NY Close): $105.84 // +2.60 // +2.52%

Prices broke resistance at 105.61, the 123.6% Fibonacci extension, with the door now open to challenge the 138.2% level at 106.81. The 105.61 level has been recast as near-term support, with a reversal back below that exposing 103.66 once again.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1759.13 // +24.18 // +1.39%

Prices pushed higher after putting in a Bullish Engulfing candlestick pattern above support 1714.60, with buyers once again testing resistance at 1763.00. A break above this boundary exposes the November 8 high at 1802.80.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $34.31 // +0.73 // +2.17%

Prices are testing range resistance at 34.37, the February 2 swing high, with a break higher exposing the October 28 closing high at 35.30. Support remains at 32.60, the 23.6% Fibonacci retracement level. A Bearish Engulfing candlestick pattern completed against a backdrop of negative RSI divergence on February 3 continues to suggest the path of least resistance favors the downside, with a daily close above 34.37 needed to invalidate.

Daily Chart – Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.836 // +0.128 // +3.45%

Prices pushed higher after putting in an Inverted Hammer candlestick above support at 3.696, the 38.2% Fibonacci retracement level reinforced by a rising trend line set from mid-December. The bulls have cleared initial resistance at 3.789 and now aim to challenge 3.909. The 3.789 level has been recast as near-term support.

Daily Chart – Created Using FXCM Marketscope 2.0

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

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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Talking Points

• Japanese Yen Selloff Continues as US Treasury Bond Yields Rise
• Euro May See Brief Gains as PMI Data Shows Mild Improvement
• British Pound Focused on BOE Minutes as Traders Shape QE Bets

Major currencies stand little changed against the US Dollar in late Asian trade, with markets apparently taking a breather after yesterday’s Greek bailout deal closed the book on a theme that preoccupied sentiment trends over several weeks. The Japanese Yen underperformed, sliding as much as 0.4 percent against its leading counterparts after US Treasury bond yields advanced as economic data in the world’s top economy continued to outperform expectations, denting QE3 expectations. Reduced demand at a 2-year Treasury note auction likewise helped push yields higher. Correlation studies show the Yen tracks closely with US bond yields.

Looking ahead, the spotlight shifts to a busy European economic calendar. First up, the preliminary set of Eurozone PMI figures is expected to show manufacturing- and service-sector activity continued to cautiously improve in February. The region-wide composite gauge is expected to rise to 50.5 compared with 50.4 in January, hovering just a hair above the 50 “boom-bust” threshold that separates contraction from expansion.

In the aftermath of the Greek bailout fiasco, the focus for the Euro has shifted to the monetary policy, underscored by a firming correlation between EURUSD and German 2-year bond yields. In this context, the mild pickup activity may offer a bit of a lift to the single currency. Importantly, PMI readings are set to remain significantly below their post-Great Recession averages, much less the peak readings recorded a year ago. This means they will almost certainly fall short of meaningfully dismissing 2012 Eurozone recession expectations, making any Euro gains a short-lived affair.

Next, the spotlight turns to the UK as the Bank of England releases minutes from its February monetary policy meeting. As usual, the vote tally will be of greatest interest as traders gauge conviction in favor of additional QE based on the number of voices in favor of the latest expansion of asset purchases on the rate-setting MPC committee. A strongly dovish bias is likely to weigh on Sterling, and vice versa.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya‘s e-mail distribution list, send a note with subject line “Distribution List” to ispivak@dailyfx.com

• Greece agreement out of the way but saga still ongoing
• UK Telegraph highlights some of the risks ahead
• Yen emerging as the major story amidst Eurozone mess
• USD/JPY breaks back above 80.00 for first time in 6 months
• Daily RSI at highest level in over 10 years

The fallout from the latest Greece agreement has been rather uneventful and the Euro remains locked in a multi-session consolidation. Although the development was indeed a positive one, investors are still anticipating more troubles out of the Eurozone over the coming days and weeks. The question on everyone’s mind right now is whether Greece will indeed be able to effectively implement the austerity measures required by the EU and IMF. The UK Telegraph has also dampened things somewhat after pointing out that with Greek elections just around the corner, there is still a good deal of uncertainty that needs to be priced in.

But with all of the attention on the ongoing Eurozone saga, some might be missing the more interesting price action in the market right now, with the Yen taking front and center stage. After months of directionless price action by record highs against the US Dollar, the Yen has finally started to breakout and to the downside for that matter, warning of a major structural shift. The recent moves by the Bank of Japan to increase bond purchases have not been taken lightly, and this is seen as the primary driver for the Yen selling.

Additionally, the impressive bid tone in global equities and the Nikkei in particular is also adding to the Yen depreciation. From here however, we think additional Yen weakness over the short-term could be a tough go, with technical studies so stretched and warning of a short-term correction. USD/JPY has broken back above 80.00, but there are some solid offers between 80.25-80.75 that should cap additional gains from here. It is also worth noting that the daily RSI in USD/JPY is at its highest levels since December 2001 when the market was trading above 130.00.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Inability to close below previous key support at 1.3025 leaves the market locked in some multi-day consolidation, with no clear short-term directional bias. At this point, the key levels to watch above and below comes in by 1.3325 and 1.2970 respectively, and a daily close above or below will be required to open the door for the next major move. Until then, we can expect to see some choppy inter-day trade.

USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after taking out the 200-Day SMA and now clearing psychological barriers by 80.00 for the first time in 6 months.This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming months. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond 80.00 over the coming sessions could prove short-lived with technical studies at their most overbought levels in over 10 years and warning of some corrective declines towards previous resistance now turned support by 78.00 before bullish continuation.

GBP/USD: The market is back to challenging the 200-Day SMA which managed to successfully cap gains on previous attempts. At this point, we continue to recommend fading any strength towards or just over the 200-Day SMA in anticipation for yet another topside failure and bearish resumption. As such, our recommendation would be to look to sell rallies towards 1.6000. Ultimately, only a close above 1.6250 would fully negate outlook.

USD/CHF: Setbacks have been very well supported in early 2012 ahead of 0.9000, and it looks as though the market could be looking to carve a medium-term higher low ahead of the next major upside extension. We will now look for a weekly close back above 0.9300 to provide added confirmation for probability of underlying bullish resumption. Ultimately, look for a push back above 0.9600 and towards 1.0000 over the coming weeks. Only a break and weekly close below 0.9000 would negate and give reason for concern.

— Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

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• Dollar Higher on a Day of Fundamental Relief…
• Euro: Why is the Market So Reserved after Greece’s Bailout?
• British Pound Slides Against Euro, Dollar, Yen Despite Four-Year High Surplus
• Japanese Yen Traders Hold Breath for Possible Risk Aversion Swell
• Australian Dollar Sliding Across the Board as Neutral RBA, Risk Off Weigh
• Canadian Dollar Decline Deviates Notably from Crude’s Surge Higher
• Gold Posts its Biggest Rally in a Week, A Return to Trend?

Dollar Higher on a Day of Fundamental Relief…

On a day that was fundamentally positive for risk trends and the euro, it may come as a surprise to see that the safe haven dollar managed to advance against all of the majors. Yet, at the root of this shift is a sense of relief for a fundamental threat that has been processed to the point of oversaturation (read more on the Greek bailout below). With our favored benchmark for risk trends (the S&P 500) unchanged through Monday, the euro limiting its gains and participation (volume and volatility) levels still surprisingly low; the market awaits something more profound.

Euro: Why is the Market So Reserved after Greece’s Bailout?

We finally have it: the Euro-area ministers have agreed to the additional austerity measures necessary from Greece to tap the second rescue program. Then why hasn’t the euro surged forward? The pressure behind the country’s ability to avoid or succumb to a default has guided not only the euro, but broader investor sentiment for months now. When the positive scenario is finally validated, the speculative drive seems to evaporate. This can speak to a few possibilities: the market fully priced in the outcome, the market is skeptical of the implementation of the necessary measures or the Private Sector Investor (PSI) component sabotages the effort. These are all viable concerns. Considering this was an ‘approval-or-default’ scenario, pricing in a positive outcome was a reasonable move. Now, speculation turns to the subsequent hurdles in implementation and questionable expectations for success with growth and deficits. Immediately ahead, we have to see whether there is a 66 percent participation rate with PSI, if the ECB’s subordination of debt causes concern and whether the Greek Parliament writes off on everything.

British Pound Slides Against Euro, Dollar, Yen Despite Four-Year High Surplus

Once again, the sterling was a mixed bag. However, the performance that really counted for the single currency was its decline against the yen, the dollar and the Euro. From GBPUSD’s retreat, we are measuring the influence of risk aversion. It’s the EURGBP and GBPJPY performances that really interest though. With the news that Greece was off the hook for an immediate default, the edge on the Euro-area financial crisis was dulled. Yet, the euro was the more direct benefactor of this shift in outlook, leading the euro to gain against the sterling and EURJPY over GBPJPY. In other news, the UK posted its biggest budget surplus in four years with the January £7.75 billion take. Yet, despite the improved fiscal position, Cameron remains adamant in caving to calls for stimulus. BoE Member Bean seems to have inadvertently offered support to Price Minister’s stubbornness when he the impact of previous QE has been “quite weak.”

Japanese Yen Traders Hold Breath for Possible Risk Aversion Swell

There was a subtle, risk aversion shift through Tuesday’s session that boosted the yen against its high-yield counterparts. However, the Japanese currency found an uneasy balance against its non-carry counterparts. So far, through the month of February; the Japanese yen has plunged between 4.5 and 5.8 percent against its major counterparts. This is a massive move for the single currency – the biggest in at least 11 months (depending on how you measure it), and the fundamental drive is well founded. That said, this is a safe haven and funding currency. And, the benchmarks for risk appetite are looking suspiciously heavy. It isn’t a coincidence that the recent leveling off on the yen crosses coincides with trouble from risk trends to extend the rally. What happens if risk appetite corrects?

Australian Dollar Sliding Across the Board as Neutral RBA, Risk Off Weigh

The Australian dollar dropped against every one of its most liquid counterparts through the past trading session. There is a notable performance variation in the pairings though that can help guide the close observer to the key fundamental aspects behind the drop. At the upper end of the spectrum, the safe havens (US dollar, Japanese yen and Swiss franc) reflect a budding risk aversion shift that is showing through more prominently here than with equities…for now. For EURAUD, the supposed short-term relief in the approval of the second Greek bailout package shows though with the 0.8 percent rally on the day. And, then there is the relatively restrained decline against fellow high-yield currencies (Canadian and New Zealand dollars). This can trace back to the willingness to further cut rates in the RBA’s recent monetary policy statement.

Canadian Dollar Decline Deviates Notably from Crude’s Surge Higher

Historically, the correlation between USDCAD and US oil prices is exceptionally strong (it was held over -0.75 for most of the past year), but recently the two have taken significantly divergent paths. In fact, in the month of February, we find USDCAD little moved while crude has surged over 11 percent peak-to-trough. The commodity is finding its drive through specific supply concerns in tensions with Iran (the country has cut of oil exports to British and French companies – though is of limited consequence). If there were nothing else for the loonie to worry about, this would be more than enough to drive the currency for the oil-exporter higher. Yet, there is more prominent theme to worry about: risk trends. Crude’s surge conflicts with hesitation on the part of underlying risk trends. And, if the greenback is part of the pairing, risk trends will prevail.

Gold Posts its Biggest Rally in a Week, A Return to Trend?

On a day that was surprisingly mute (contrasting the remarkable fundamental developments), gold was a standout. The precious metal put in for an impressive 1.4 percent rally – the largest advance in two weeks and the fourth best, single-day performance this year. Of further interest was the surge in volume and the pickup in the CBOE’s gold volatility index from seven-month lows. For all intents and purposes, this was a significant move. This could be considered an unexpected move for a number of reasons (it is a rally alongside a dollar advance, the primary headline would suggest risk appetite is approving), but there is a reasonable explanation for this move. Gold is indeed a safe haven asset – it’s positive correlation to traditional risk trends is attributable to an inverse anti-dollar move as the need for liquidity washes away – but it is also an alternative to fiat currency and government bonds that are manipulated by stimulus and intervention. With the approval of the second Greek bailout program, investors are encouraged to diversify funds away from the world’s second most-used currency (the euro). In essence, the precious metal is in good standing in a risk-on build that is based on stimulus or should risk aversion drive traders from speculative assets.

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ECONOMIC DATA

Next 24 Hours

SUPPORT AND RESISTANCE LEVELS

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CLASSIC SUPPORT AND RESISTANCE –EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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

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

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Additional Content:Money Management Video

Trading the News Video

Trading the News: Bank of England Minutes

What’s Expected:

Time of release: 02/22/2012 9:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: –

Previous: –

DailyFX Forecast: –

Why Is This Event Important:

The Bank of England Minutes may spur a bullish reaction in the British Pound as we expect the central bank to soften its dovish tone for monetary policy, and the Monetary Policy Committee may endorse a wait-and-see approach throughout 2012 as the economic recovery in the U.K. gradually gathers pace. As the BoE now sees a limited risk of undershooting the 2% target for inflation, we are likely to see a more balanced statement, and the MPC may look to conclude its easing cycle this year as the fundamental outlook for Britain improves.

Recent Economic Developments

The Upside

The Downside

The rise in private sector consumption paired with the rebound in household sentiment may encourage the BoE to raise its fundamental outlook for the U.K., and the development may spark another run at the 200-Day SMA (1.5917) as market participants scale back speculation for more quantitative easing. However, the BoE may hold a cautious tone for the region amid the ongoing weakness in the labor market paired with fears of a double-dip recession, and the central bank may keep the door open to expand its asset purchase program beyond GBP 325B in order to stem the downside risks for growth and inflation. In turn, the GBP/USD may continue to give back the rebound from the previous week, and we may see the exchange rate struggle to hold above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5730-50 as market participants raise bets for additional monetary support.

Potential Price Targets For The Rate Decision

A look at the encompassing structure of the GBPUSD sees the pair probing below the key 61.8% Fibonacci extension taken from October 6th and January 13th troughs at 1.5790 with the 10-day moving average providing some interim daily support at 1.5777. This level is now our bottom limit with a break eyeing subsequent support targets at 1.5730 and the 50% Fibonacci extension at 1.5685. Daily resistance holds at the convergence of trendline resistance dating back to the October 31st high and soft resistance at 1.5880 backed by the 76.4% extension at 1.5925. Note that the slope of the daily relative strength index suggests further losses in the interim with a break below the 50-mark risking further losses for the pound.

Interim support rests with the 38.2% Fibonacci extension taken from the February 8th and 20th crests at 1.5770, backed by 1.5750, the 50% extension at 1.5735, and the 61.8% extension at the 1.57-figure. Soft resistance holds at 1.5790 with subsequent topside targets eyed at the 23.6% Extension at 1.5815, 1.5840, and 1.5860. Should the BoE Minutes prompt a bullish reaction, look to target topside levels with a breach above our Fibonacci reference point at 1.5780 negating subsequent support targets. Such a scenario eyes initial targets at the 1.59-handle and the 2012 high at 1.5925.

How To Trade This Event Risk

Trading the given event risk is certainly not as clear cut as some of our previous trades, but a less dovish statement could pave the way for a long British Pound trade as market participants curb speculation for more QE. Therefore, if the central bank strikes a neutral tone for monetary policy and raises the outlook for the region, we will need a green, five-minute candle subsequent to the release to establish a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to protect our profits.

On the other hand, fears of a double-dip recession paired with the ongoing weakness within the real economy may lead the BoE to maintain a dovish outlook for monetary policy, and the central bank may see scope to expand monetary policy further in an effort to stimulate a stronger recovery. As a result, if the MPC curbs its forecast for growth and inflation, speculation for more QE is likely to weigh on the exchange, and we will implement the same strategy for a short pound-dollar trade as the long position laid out above, just in reverse.

Impact that the Bank of England Minutes has had on GBP during the last release

January 2102 Bank of England Minutes

After voting unanimously to maintain its current policy in January, the Bank of England left the door open to expand its asset purchase program in an effort to shield the U.K. economy from a ‘renewed severe downturn,’ but struck a more balanced tone for the region as central bank officials expect to see a stronger recovery in 2012. As the MPC softened its dovish outlook for monetary policy, the statement pushed the GBP/USD back above 1.5550, and the sterling continued to gain ground during the North American trade to settle at 1.5653.

— Written by David Song, Currency Analyst and Michael Boutros, Currency Strategist

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

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex.

To be added to David’s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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View the Expo Presentation on ‘Trading the News’ For Additional Resources

The UK suffered from a boom and bust of housing bubble, similar to the US, Ireland, Spain and many other countries.

The housing sector has shown signs of recovery. This is seen in the Construction PMI and also in house prices. But there is a growing gap between London and all the rest.

Rightmove is a huge British real estate website. It boasts over a million properties for sale in the UK, including properties from developers. It also provides a variety of homes for British expats in Spain. The variety is large, to say the least.

Its recent HPI showed a jump of 4.1% in prices in February, and a yearly rise of 1.4%. Has the sector bottomed out? In its report, Rightmove mentioned more mortgage deals and evidence that dormant buyers are springing back to life.

It also mentioned that London prices are now within 1% of the all-time high. Have good times arrived? Is the British economy booming?

The economy certainly isn’t booming. It actually squeezed in Q4. Unemployment is relatively high at 8.4% and austerity measures threaten to put more pressure. The BOE just expanded its QE program in order to support the economy.

Why is London booming?

• The British capital is also one of the “world’s capitals” for the financial sector, arts and practically everything.
• The British south has always been richer than the north. Gaps that widened in the 80s were never narrowed.
• Euro-crisis: London is good place to “hide” from the euro-zone crisis. This is especially true for those fearing of European proposals of a financial transaction tax (Tobin tax).

Outside of London, the picture is different. The economic troubles are taking their toll on prices. HBOS has recently showed a drop in prices in Scotland, Northern Ireland and also in Northern England.

So, the rises in London are pushing the HPIs higher, but certainly do not reflect the state of housing in the UK or the state of British economy. The recovery still has a long way to go.

Further reading: GBP/USD Forecast.

By Yohay Elam, Forex Crunch

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