Fundamental Headlines

- Greek President Told Banks Anxious as Deposits Pulled – Bloomberg

- Merkel-Hollande Meeting Yields Greece Growth Signal – Bloomberg

- BoE Cites Increased Risk of Disorderly Euro Outcome – DailyFX

- Hedge or Bet? Parsing the JPMorgan Trade – WSJ

- Mortgage Delinquencies Decline – WSJ

European Session Summary

After Greek leaders announced that they failed to form a government, guaranteeing at least one more round of elections, higher yielding currencies and risk-correlated assets entered a free fall. The EURUSD fell to its lowest level since January 17 overnight while the AUDUSD dropped to its lowest level since December 15. Similarly, global equity markets have sold off sharply in the aftermath, with Asian shares being hit the hardest.

With a weak start to the London trading session, it appears that today could have been a day of panic. It was not, however, with the majors setting their lows against the US Dollar by 08:00 GMT, leading to a modest rally – profit taking, it appears. Before this rally, however, and as the Australian Dollar and the Euro set fresh May lows, pressure in the bond market reached distressing levels unseen the height of the crisis last fall.

The major headlines from last night, of note: Italian 10-year bond yield rises above 6 percent for first time since January 31; Spanish 10-year bond yield reaches 6.5 percent for first time since November 29; and the Spanish-German 10-year spread widens to 500-basis points for first time since November 18; and German 10-year government bond auction draws record low yield. These are not the headlines that suggest another bull run is around the corner; but rather to ‘hoard cash and hide.’

Post-US cash equity open today more of these headlines came across the wires, with the European Central Bank announcing that it would not change its policy outlook, a sign that another longer-term refinancing operation (LTRO) is all but a dream at this point. Perhaps more important was the decision that the ECB was ceasing its monetary operations with four Greek banks due to recapitalization issues (UPDATE: Deutsche Bank notes this is a “non-event for the top-4” as the ECB’s decision does not affect the four systemic banks, Alpha Bank, Eurobank EFG, NBG, or Piraeus Bank). Regardless, the rally stoked this morning has fallen flat and higher yielding currencies and risk-correlated assets are under pressure in the closing minutes of European trade.

Taking a look at credit, periphery bond yields have fallen back from this morning’s highs, with the Italian and Spanish 10-year bond yields dropping to 5.802 percent and 6.243 percent, respectively. The German 10-year Bund continues to hover near its all-time low yield (high in price) at 1.455 percent, trading at 1.467 percent at the time this report was written.

AUDUSD 5-min Chart: May 16, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

Despite the ECB news, the Euro has been the top performer today, gaining a mere 0.16 percent against the US Dollar thus far on Wednesday. The New Zealand Dollar has been the worst performer, with the NZDUSD shedding 0.39 percent. After setting new lows and then trading above today’s opening range, the AUDUSD is relatively unchanged, down 0.02 percent.

24-Hour Price Action

Key Levels: 16:30 GMT

Thus far, on Wednesday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 10104.40 at the time this report was written, after opening at 1010097.91. The index has traded mostly higher, with the high at 100133.07 and the low at 10096.82.

Despite all of this progress, it is possible that that we have another spurt of volatility after Europe has closed, with the Federal Open Market Committee April 24 to 25 meeting minutes scheduled to be released today at 18:00 GMT. Considering the tone that Chairman Ben Bernanke took at the press conference following the meeting, Currency Analyst David Song notes that “a dovish statement could spark a short-term correction in the USD, and the dollar may consolidate going into the end of the week as the rally from the beginning of the month remains overbought.”

— Written by Christopher Vecchio, Currency Analyst

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

Follow him on Twitter at @CVecchioFX

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

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.08 percent higher from the open after moving 82 percent of its average true range, and the greenback may track higher over the remainder of the week as the upward trending channel continues to take shape. As the flight to safety gathers pace, the shift away from risk-taking behavior should further increase the appeal of the greenback, but we may see the dollar hold steady going into the FOMC minutes as the board maintains a cautious outlook for the world’s largest economy. As an increasing number of central bankers expect to see a more robust recovery and take note of the stickiness in price growth, we should see the Fed continue to soften its dovish tone for monetary policy, but Chairman Ben Bernanke may keep the door open to expand monetary policy further as the sovereign debt crisis continues to pose a threat to the global financial system.

As the USDOLLAR clears the 78.6 percent Fibonacci retracement around 10,118, we will be looking for a close above the key figure to see the rally gather pace, and the greenback may continue to mark fresh highs for 2012 as the relative index continues to push into overbought territory. As the fundamental outlook for the U.S. continues to improve, the FOMC may sound more hawkish this time around, and we may see the committee move away from its easing cycle as growth and inflation picks up. However, as Fed Chairman Bernanke continues to highlight the risks surrounding the real economy, we may see the central bank head renew speculation for more quantitative easing, and dovish comments coming out of the central bank may spark a short-term reversal in the index as the rally remains overbought. Nevertheless, as the index carves out a lower high coming into May, we are still watching the broad ascending triangle carried over from the previous year, and the bullish pattern should continue to take shape in the coming months as market participants start to look for a rate hike from the FOMC.

The greenback rallied against all four components on Wednesday, led by a 0.38 percent decline in the British Pound, while the Japanese Yen weakened another 0.18 percent. It seems as though the USDJPY has carved out a bottom in May as the pair breaks out of the downward trending channel carried over from April, and the exchange rate looks posed to resume the advance from earlier this year as the Bank of Japan struggles to address the risks surrounding the world’s third-largest economy. Indeed, the BoJ halted its asset purchase program as it struggled to obtain enough government securities to meet its JPY 600B target, and the central bank may face increased pressure to utilize additional policy tools to shore up the ailing economy. As the ongoing strength in the local currency continues to undermine the efforts taken by the BoJ, there may be increased calls to intervene in the foreign exchange market, and we will maintain our bullish call for the USDJPY as the central bank looks to carry its easing cycle into 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

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

Gold and silver continued their downward trend during yesterday’s trading despite the slightly positive news of the higher than expected growth rate of Germany’s GDP in the Q1 2012 (a growth rate of 0.5%); the news of the new elections in Greece to be held in June raised the anxiety in the markets and dragged down the Euro. This news may continue to affect the forex and commodities markets in the days to follow. As stated in the weekly gold outlook there are many items on today’s agenda: the minutes of April FOMC meeting, U.S housing starts report, ECB President speaks, Euro Area Annual Inflation and BOE Inflation Report .

Gold slipped again on Tuesday by 0.25% to $1,557.1; silver also declined by 0.96% to $28.08. During the month gold fell by 6.44% and silver by 9.47%.

On Today’s Agenda

Minutes of April FOMC Meeting: Following the recent FOMC meeting, in which it was decided to keep the monetary policy unchanged, the market didn’t react to this news as metals only slightly rose. The minutes of the FOMC meeting might offer some insight behind this decision regarding the future steps of the FOMC;

U.S. Housing Starts: the housing starts figures were historically correlated with gold– as housing starts declined, gold tended to increase the following day; in the previous report, the adjusted annual rate declined by 5.8% (M-O-M) to 654,000 in March;

Forex / Bullion– May Update

The Euro/USD declined again on Tuesday by 0.73% to 1.2729 – the lowest level since January 2012. As indicated below the correlation between gold and Euro/USD slightly fell in recent weeks but is still mid-strong (currently it stands at 0.33). Nevertheless, since these currencies pairs are still strongly and positively correlated with metals, as the USD continues to appreciate against the Euro, bullion may continue to be adversely affected from this trend.

Daily Outlook

I speculate bullion will continue their downward trend during today’s trading. The upcoming reports from the U.S may curb this downward trend if the housing starts will continue to fall and if the FOMC minutes might reveal some more hints of a potential monetary expansion is in the horizon (I suspect low chances for this in the near future). The political developments in the Euro Area mainly Greece may keep the anxiety levels in the financial markets high so that the Euro might continue its weakness against the USD; this Greek news may also drag along with it commodities.

This gold and silver prices forecast was first presents in Trading NRG

For further reading:

Weekly Outlook for May 14-18 2012

Gold and Silver Weekly Outlook for May 14-18

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

We still suspect the Dollar has ended the larger downside correction from the 84.15 peak. We have found solid support and have been basing in the ideal 79.55 to 79.15 target zone. Also we are now starting to see bullish price action, with an initial 5 wave rally to about 80.00 and the irregular downside correction into projected 79.70 channel support. Currently we are witnessing another 5 wave uptrend sequence. While resistance at fourth of a lesser degree of 80.60 may prove difficult and probably provide another pullback to the 80.20 break out level, continue to buy dips against the 79.70 pivot. An ideal wave count would see 80.20 hold with a final push to about 81.25 to finish the first leg of uptrend. However, we would not be over concerned with a deeper 50 to 61.8 percent pullback to the 79.85-80.00 region. Ironically this larger pullback would reveal upside nesting for a stronger attempt at the last 81.75 correction high. Only below 79.70 would suggest we are premature in the bullish view and allow a final decline to about 79.15.

Talking Points

• British Pound: BoE Curbs Growth, Inflation Forecast – 1.5800 In Sight
• Euro: Eyes 23.6% Fib For Support, IMF Strikes Cautious Tone For Italy
• U.S. Dollar: Index Approaches December High, FOMC Minutes In Focus

British Pound: BoE Curbs Growth, Inflation Forecast – 1.5800 In Sight

The British Pound tumbled to a fresh monthly low of 1.5888 as the Bank of England kept the door open to expand monetary policy further, and the sterling may face additional headwinds over the near-term as the spillover effects from the sovereign debt crisis dampens the outlook for the region. Indeed, the BoE curbed its growth forecast and saw a risk of undershooting the 2% target on the back of subdued wage growth, but went onto say that the ‘big picture’ has not changed from February as policy makers expect to see a gradual recovery in Britain.

At the same time, the central bank warned of a disorderly outcome in the euro-area as the governments operating under the single-currency struggle to meet on common ground, and it seems as though the Monetary Policy Committee will carry its wait-and-see approach into the second-half of the year in an effort to shield the U.K. economy. Nevertheless, the BoE continued to highlight the stickiness in price growth as they see inflation staying above target through 2013, and it may become increasingly difficult for the central bank to defend its stance as underlying price pressures resurface. As the GBPUSD fails to maintain the upward trending channel from earlier this year, we expect to see a test of the 1.5800 figure for support, and the pair may trade sideways ahead of the BoE Minutes due out next week as market participants weigh the prospects for monetary policy.

Euro: Eyes 23.6% Fib For Support, IMF Strikes Cautious Tone For Italy

The Euro snapped back from an overnight low of 1.2680 amid the rebound in risk sentiment, but the single currency may face additional headwinds going into the end of the week as heightening finance costs across the region raise the risk for contagion. Indeed, the yield tied to Italy’s 10-Year debt breached 6% while the 10-year spread between Spain and German bonds widened to 500bp for the first time since November, and the ongoing turmoil in the region continues to cast a bearish outlook for the EURUSD as European policy makers struggle to restore investor confidence. In response, the International Monetary Fund argued that ‘a lot remains to be done’ in Italy as the group sees the region contracting in 2012, and the European Central Bank may come under increased pressure to expand monetary policy further as the region continues to face a risk for a prolonged recession. As we expect the ECB to carry its easing cycle into the second-half of the year, we will preserve our bearish outlook for the EURUSD, but the pair looks poised for a short-term correction as the recent decline remains oversold. As the euro-dollar comes up against the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, we may see the figure provide interim support, but we will need to see the relative strength index cross back above 30 to see a meaningful rebound in the exchange rate.

U.S. Dollar: Index Approaches December High, FOMC Minutes In Focus

The greenback continued to gain ground on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a fresh monthly high of 10,100, but we’re seeing the reserve currency consolidate ahead of the FOMC Minutes as market participants weigh the prospects for monetary policy. As Fed officials take note of the more robust recovery paired with the stickiness in price growth, the central bank may sound more hawkish this time around, and we may see the committee continue to talk down speculation for another large-scale asset purchase program as the world’s largest economy gets on a more sustainable path. However, we may see Fed Chairman Ben Bernanke keep the door open to expand monetary policy further as the sovereign debt crisis continues to pose a threat to the global financial system, and we may see the central bank head renew expectations for additional monetary support as Mr. Bernanke continues to highlight the ongoing weakness in the private sector. In turn, a dovish statement could spark a short-term correction in the USD, and the dollar may consolidate going into the end of the week as the rally from the beginning of the month remains overbought.

— 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, Copper Sold on Greece Woes – Fed Minutes Key Ahead
• Gold and Silver Vulnerable if Fed Minutes Dent QE3 Expectations

Commodity prices are trading broadly lower in European hours as risk aversion grips financial markets, weighing on sentiment-linked crude oil and copper prices while boosting the safe-haven US Dollar to put de-facto downward pressure on gold and silver. The sour mood comes after continued gridlock in Greece spurred the country’s lawmakers to call for new elections, which traders fear may produce a ruling majority for anti-austerity parties (and in particular, Syriza). This threatens to lead Athens to renege on its obligations under the EU/IMF bailout agreement, which may ultimately see the country leave the Eurozone.

Looking ahead, the spotlight turns to theFederal Reserve as the central bank publishes minutes from its late-April policy meeting. As we discussed previously, markets seized on Chairman Bernanke saying the bank was “prepared to do more” to help the economy if growth faltered, singling out additional QE as still “on the table” and boosting risk appetite in the process. However, the Fed chief likewise said that it would be “very reckless” to allow higher inflation for the sake of reducing unemployment while his colleagues upgraded bets on US jobs, employment and price growth.

This painted a rather different picture, wherein the Fed kept its options open just in case but was broadly leaning against further asset purchases. Risk aversion may find a further catalyst if that side of the story reemerges in the minutes and finally gets its chance to be thoroughly priced in, driving crude oil and copper lower still. Such an outcome is also likely to punish precious metals as demand for alternative stores of value evaporates along with fading US Dollar dilution fears.

WTI Crude Oil (NY Close): $93.98 // -0.80 // -0.84%

Prices are testing support at 92.51, the December 16 low, with a break below that on a daily closing basis exposing the next layer of support at 90.49. Near-term resistance is at 95.41, the February 2 session low.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1544.21 // -12.51 // -0.80%

Prices surpassed the measured target of a Triangle chart pattern carved out since late March at 1548.21 to probe below support at 1543.98, the 76.4% Fibonacci expansion. A break below this boundary sees supports at 1532.45 and 1522.50, the September 26 and December 29 spike lows respectively, followed by the 100% expansion at 1502.15. Initial resistance lines up at 1569.99, the 61.8% Fib.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $27.73 // -0.42 // -1.50%

Prices are testing support at 27.06 marked by the December 28 session close. A break below this boundary exposes the 26.05-15 area marked by the September 26 and December 29 spike lows. Near-term resistance is at 28.70.

Daily Chart – Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.518 // -0.036 // -1.01%

Prices broke support at 3.516, the 61.8% Fibonacci retracement, with sellers now targeting the 76.4% boundary at 3.404. The 61.8% Fib has been recast as near-term resistance.

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 Ilya 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

Talking Points

• US Dollar, Japanese Yen Outperform as New Greek Elections Spark Risk Aversion
• British Pound Looks Past Jobless Claims Data, Focusing on BOE Inflation Report
• Slower Eurozone CPI May Compound Euro Selling on ECB Easing Expectations
• FOMC Meeting Minutes May Dent QE3 Expectations, Adding Fuel to Dollar Rally

The US Dollar and Japanese Yen pushed broadly higher overnight as stock prices collapsed, boosting demand for the go-to safe haven currencies. The MSCI Asia Pacific regional benchmark equity index slumped 2.5 percent as continued gridlock in Greece spurred the country’s lawmakers to call for new elections, which traders fear may produce a ruling majority for anti-austerity parties (and in particular, Syriza). This threatens to lead Athens to renege on its obligations under the EU/IMF bailout agreement, which may ultimately see the country leave the Eurozone and possibly even the wider EU. Stock index futures tracking key European and US equity benchmarks are pointing sharply lower, arguing for continued risk aversion ahead.

The Bank of England Inflation Report headlines the economic calendar, with traders looking to the document as the primary guide for policy expectations in the coming three months. Minutes from April’s BOE sit-down showed it’s theretofore most dovish voice – Adam Posen – withdrew his long-standing call for more QE amid concerns about sticky core inflation. If Mr. Posen believes this overshadows the UK economy’s descent into recession, other less-dovish members of the committee may do so as well. Confirmation that this is indeed the case is likely to prove supportive for the British Pound, boosting front-end yields and scattering dilution fears.

Elsewhere, UK Jobless Claims figures are due to show applications for benefits rose by 5,000 in April, putting the Claimant Count (a proxy for the unemployment rate) at 5 percent for the first time since September 1997. While the outcome certainly appears ominous, its negative implications for Sterling may prove limited unless it is perceived to carry meaningfully dovish implications for BOE policy (which brings the focus back to the Inflation Report, as noted above). Eurozone CPI figures are due to show headline inflation slowed to 2.6 percent in April, the lowest in eight months. The outcome may compound already significant downward pressure on the Euro as easing price growth is perceived to give the ECB room to ease monetary policy.

Later in the day, the spotlight shifts to the Federal Reserve as the central bank publishes minutes from the late-April policy meeting. As we discussed previously, markets seized on Chairman Bernanke saying policymakers were “prepared to do more” to help the economy if growth faltered, singling out additional QE as still “on the table”, pushing the Dollar lower in the announcement’s aftermath. However, the Fed chief likewise said that it would be “very reckless” to allow higher inflation for the sake of reducing unemployment while his colleagues upgraded bets on US jobs, employment and price growth. With that in mind, the greenback may find added support if that side of the story reemerges in the minutes and finally gets its chance to be thoroughly priced in.

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

• Ongoing turmoil in Greece pressures markets lower
• Fear of contagion to larger EX economies weighing
• Technical studies are however stretched
• Investors looking to retest Euro 2012 lows
• Looking for technical bounce before trend continuation

The latest bout of intensified selling in the Euro has been attributed to the ongoing political turmoil in the Eurozone.Currencies in general have followed suit, and are under pressure against the buck. With no clear resolution in sight for Greece, and new elections on the horizon, many now fear the worst and the possibility of a Greek exit is looking more realistic with every passing day. However, while the possibility is increasing and panic and uncertainty are running high on threat of contagion to larger Eurozone economies. We still do not see the markets at risk for a material sell-off from current levels before a technical correction.

We contend that the latest bout of risk-off trade has been driven more by technical selling, resulting from a daily close below 1.3000 in the Euro several days back, which now has traders setting sights set on a retest of the 2012 lows from January at 1.2625. However, given how severely overextended markets are at present, there should soon be some relief, at least for a little while, before risk liquidation continues. We often find that the middle of the week brings a reversal during periods of intense volatility, and we suspect that the US Dollar may find a top today before selling off into the remainder of this week and the next. Looking ahead, there is a good deal of economic data on tap, although we suspect attention will be focused to the FOMC Minutes due out later in the day.

Technical outlook:

EURUSD – The market remains under intense pressure and the focus for now is squarely on a retest of the 2012 lows from January at 1.2625. While we would not rule out a possibility of a test of this level over the coming sessions, short-term technical studies are well oversold and are showing a need for some form of a corrective bounce from where a fresh lower top is sought out. Ultimately however, any rallies should now be very well capped by previous support turned resistance at 1.3000 in favor of additional weakness over the medium-term that projects deeper setbacks into the lower 1.2000′s.

USDJPY – The market continues to consolidate around 80.00 and is in the process of looking for a medium-term higher low ahead of the next major upside extension back above the yearly highs at 84.20 and towards 90.00 further up. However, for the time being it remains in question whether the market will still head lower towards the 200-Day SMA by 78.50 before ultimately reversing higher. The key level to watch above comes in by 80.60, and a break and close above this level will officially alleviate downside pressures and suggest that a higher low has now been carved in the 79.00′s.

GBPUSD – The latest daily close below 1.6050 now opens the door for an acceleration of declines over the coming days back down towards next key support in the 1.5800′s. At this point, look for any intraday rallies to be very well capped ahead of 1.6200, while only back above 1.6300 would negate outlook and give reason for pause.

USDCHF – Overall the structure remains highly constructive and we continue to project additional upside over the coming months back above parity. For now, the latest break and close above 0.9335 is expected to accelerate gains for a retest of the yearly highs by 0.9600, while any intraday pullbacks should be very well supported ahead of 0.9200. Ultimately, only back under 0.9000 would negate outlook and give reason for pause.

The strength of the Japanese yen loved by shoppers is hated by the Japanese administration, politicians and corporations. The head of Nissan recently said that yen strength is like a “1,000-pound gorilla” that scuppers our ability to sell cars abroad.

After having embarked on several bouts of intervention, some in coordination with other central banks, to weaken the yen and repeatedly boosting the size of its asset-purchase program the Bank of Japan (BOJ) and Ministry of Finance (MOF) are taking a more subtle approach. Late in April the asset-purchase plan was increased again, by another ¥5 trillion, and the maturity of government bonds was extended from two to three years. Action, which comes after special easing measures in February which resulted in a significant weakening of the yen, and is believed to be aimed at currency markets.

The finance ministry has been playing its part too. The IMF is set to boost its funds by $430 billion in an effort to lift concerns that the institution doesn’t have the fire power to contain the EU debt crisis. The Japanese finance ministry is the single largest contributor to the increase. This is a surreptitious move on the MOFs part to weaken the yen indirectly. When the euro crisis worsens and investors panic they usually flee into safe haven assets, of which the yen is one, strengthening the currency. It is in Japan’s interest that investors believe that the IMF can contain the crisis and exit their safe haven positions allowing the currency to weaken.

Politicians have entered the fray too, calling on the BOJ to take further action to weaken the currency. Politicians have lately been pointing to figures that show that the BOJs asset-purchase program is significantly smaller than other major central banks’ (it’s about two-thirds of the Federal Reserve’s program and less than half the ECBs purchases). The BOJs obstinance toward expanding their asset-purchases further has rankled politicians who are threatening the central bank with reforms that could curb its independence; threats that are foolish at a time when the administration needs to work harmoniously.

The central bank continues to remind politicians and investors alike that it doesn’t have a magic wand which can be waved. It also warns against monetising debt by printing money. This doesn’t mean that the BOJ has no tricks left up its sleeve; some perceive the hefty IMF contribution as an effort by Japan’s leadership to smooth the way for further overt currency intervention (or manipulation) which usually draws the ire of the international community.

The strength of the yen despite all these efforts suggests that global risk appetites have a bigger influence on the market than the BOJ. The BOJ may not be able to control the trend that currency markets have adopted even if it employs more subtle tactics. All that remains is the possibility of mimicking the SNBs model and establish a floor that will be defended at all costs.

Written by Jonathan Granby

Jonathan is a weekly columnist for DailyFX.com. He is currently pursuing his master’s degree and working with Dr. Paul Rivlin studying economic development in MENA, with a particular focus on trade between the MENA region and China. Jonathan has previously held positions in financial services and public policy.

• Dollar Wins its Highest Close Since January 2011, Buckle Up
• Euro: GDP Readings Beat Forecasts, Outlook Still Painful
• British Pound Looks for a Return to Volatility on BoE Report
• Japanese Yen Assess the Potential Impact for 1Q GDP
• Australian Dollar Rallies Against All but the Greenback
• New Zealand Takes a Hit Across the Board
• Gold: Do or Die Time at Serious Support

Dollar Wins its Highest Close Since January 2011, Buckle Up

Considering benchmark pairs like EURUSD and AUDUSD were already forging serious headway in their dollar-bullish trends, it was only a matter of time before the Dow Jones FXCM Dollar Index finally made the mark of real progress. That score was made with Tuesday’s close as the Dollar Index stamped its daily bar at 10093 – the highest close for the benchmark since January 12, 2011. On this basis alone, it looks like we have crossed a significant threshold of sentiment whereby bullish interests can finally build momentum. However, both technical and fundamental traders should see the need for caution in moving too hastily on moving full tilt behind the dollar.

For the technical trader, the close at this height is certainly significant; but making it to the vicinity of consistent 10,100-resistance does not guarantee follow through. Bulls learned that lesson back in March when on the 14th of the month, the greenback set its highest close since the previous October but ultimately failed to capitalize on the move. To make that critical transition from breakout to follow through – which seems so tantalizingly close – is the right fundamental encouragement. There is little doubt that the dollar has gained a lot of ground under its own power, but it has also capitalized on the weakness of counterparts to get to this point. After the exceptional run that has already been put in (the USDollar Index is up over 280 points from its swing low at the beginning of the month), the dollar needs to generate its own power.

To leverage a true bull trend, the greenback has one of two options – become more competitive on a return basis (not likely given the Fed’s stance on rates) or play to the benchmark’s absolute safe haven status. For this, I keep switching back and forth between the Dollar Index and S&P 500 charts. One of the benefactor of absolute liquidity demand and the other is the stimulus-fortified representation of passive growth investment. We need to tip that balance on underlying sentiment. That said, our biggest catalyst to this point for risk aversion may start running out of steam. The European crisis is progressing, but the tangible deteriorate may ease somewhat as the next milestones in the slow motion crash could be further down the road (more on that below). If the market strains its eyes, perhaps a ‘no QE3’ read from the minutes will do.

Euro: GDP Readings Beat Forecasts, Outlook Still Painful

We have cleared another wave of critical event risk for the Euro. Looking at the aftermath of the euro’s performance, it should seem obvious how the data was interpreted; but some may still be confused. Didn’t many of the 1Q GDP readings for the Euro Zone end up beating their respective forecasts? Indeed, they did. If the general tone for the capital markets were one of optimism, a beat on these important economic readings could have offered a boost; but that is not the hand we have been dealt. Fear reigns and bears are in charge. Though the Euro Zone, German, French and Portuguese GDP readings managed to meet or beat their respective projections; they are all still on a downward trajectory – and 2Q isn’t shaping up so well. Nevertheless, we have passed this threat for now, and we won’t have growth updates for some time. Furthermore, the time frame for a second Greek election is a ways out while Spain’s financial troubles seem to be on ice after a nationalization and mass cajas merger. The euro is already limping, so it wouldn’t take much of a push to drive the euro again. That said, we still need a push.

British Pound Looks for a Return to Volatility on BoE Report

The sterling has held out against the storm of many different fundamental waves thanks to its separation from the immediate Euro Zone troubles as well as its ambiguous monetary policy bearing. That stability is already starting to breakdown however. This past session, the pound tumbled against the dollar as Euro-region fears started to trickle through the EU lines. The upcoming session my find the sterling determining its own future. The shift from unwavering BoE dove Posen not long ago was influential enough to keep the currency on a bullish track even through the news of a double dip recession. That good will may be at risk though with the upcoming Quarterly Inflation report. Watch for dovish forecasts.

Japanese Yen Assess the Potential Impact for 1Q GDP

Though Asian equity benchmarks were extending their bear trends beyond merely ‘catching up to the US market’s decline’, the Japanese yen was still showing losses against the US dollar, euro and even Australian dollar early Wednesday morning. This carry unwind pause could be a leading sign that risk trends could level off; but regardless, the timidity to the move won’t last. Early tomorrow morning Tokyo time, yen and equity traders should watch for the impact from the Japanese 1Q GDP reading. Is the world’s third largest economy keeping up its corner.

Australian Dollar Rallies Against All but the Greenback

It was an interesting development. Despite the distinct risk aversion drive through Tuesday’s session, the Australian dollar managed to advance against all but the most extreme safe haven (and possibly still undervalued) – the US dollar. Clearly, risk trends hadn’t improved to give the currency a yield advantage on the day. Perhaps this is a sign that we have found a level for the Aussie dollar that fully reflects the negative interest rate expectations moving forward. That doesn’t mean the decline is over – it would just require a heavy risk aversion flow.

New Zealand Takes a Hit Across the Board

The exact contrast of its Australian counterpart, the New Zealand dollar tumbled against every one of its most liquid counterparts. If we run on the same background information as its high-yield comrade, we know risk trends were still retreating. Yet, where the Aussie dollar has numbed itself to more restrained carry deleveraging efforts, the New Zealand currency is still exposed as its own interest rate outlook is still attempting to hang on to its neutral/hawkish outlook. Keep an eye on rate forecasts, which now price in a 42 percent chance of a 25bp cut next meeting.

Gold: Do or Die Time at Serious Support

A third consecutive decline (and the ninth in the past 11 active trading sessions) has ushered gold down to another critical level. Having broke the trendline that kept the metal in a comfortable bull trend for three years last week, we are now upon the 1550/25 zone of support going back to July. To break a level of this magnitude, we need to see serious dollar or liquidity interests that circumvent the metal’s safe haven status.

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ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
0:30	AUD	Westpac Consumer Confidence s.a. (MoM) (May)	–	-1.6%	Australian unemployment rate unlikely to hold at current 4.9 percent as slowdown in non-mining sector of economy affects wages, consumer activity
0:30	AUD	Westpac Consumer Confidence Index (May)	–	94.5
1:30	AUD	Wage Cost Index QoQ (1Q)	0.8%	1.0%
1:30	AUD	Wage Cost Index YoY (1Q)	3.5%	3.6%
8:00	EUR	Italian Trade Balance (Total) (Euros) (Mar)	–	-1113M	Exports unlikely to provide significant support to economy in 4th recession in 2001
8:00	EUR	Italian Trade Balance EU (Euros) (Mar)	–	439M
8:30	GBP	Jobless Claims Change (Apr)	5.0K	3.6K	Bleakness on UK labor market to continue on ongoing government austerity, double-dip recession
8:30	GBP	Average Weekly Earnings 3M/YoY (Mar)	1.0%	1.1%
8:30	GBP	ILO Unemployment Rate (3mths) (Mar)	8.4%	8.3%
9:00	EUR	Euro-Zone CPI – Core (YoY) (Apr)	1.5%	1.6%	ECB generally sees inflation in Eurozone converging to 2 pct target
9:00	EUR	Euro-Zone CPI (YoY) (Apr)	2.6%	2.7%
9:00	CHF	ZEW Survey (Expectations) (May)	–	2.1
9:00	EUR	Euro-Zone Trade Balance s.a. (Mar)	3.8B	3.7B	Economic slowdown worldwide, especially China, could affect exports in medium term
9:00	EUR	Euro-Zone Trade Balance (Mar)	4.0B	2.8B
9:30	GBP	Bank of England Inflation Report			Markets to scrutinize closely to gauge extent of MPC’s “hawkish” turn.
12:30	USD	Housing Starts (Apr)	685K	654K	Recent data on housing markets mixed, with new and pending home sales better than forecast but existing home sales disappointing
12:30	USD	Housing Starts MOM% (Apr)	4.7%	-5.8%
12:30	USD	Building Permits (Apr)	730K	764K
12:30	USD	Building Permits MOM% (Apr)	-4.5%	4.5%
13:15	USD	Industrial Production (Apr)	0.6%	0.0%	US manufacturing still generally robust, but regional activity gauges increasingly showing strains
13:15	USD	Manufacturing (SIC) Production (Apr)	–	-0.2%
14:00	USD	Mortgage Delinquencies (1Q)	–	7.6%
14:00	USD	MBA Mortgage Foreclosures (1Q)	–	4.4%
18:00	USD	Minutes of FOMC Meeting			FOMC could emphasize loose policy amid softer data
22:45	NZD	Producer Prices – Inputs (QoQ) (1Q)	0.0%	0.5%	With weak inflation and modest growth, RBNZ rate hike in 2012 appears increasingly unlikely
22:45	NZD	Producer Prices – Outputs (QoQ) (1Q)	0.0%	0.1%
23:50	JPY	Housing Loans YoY (1Q)	–	2.2%	Return to growth expected in 1st quarter, but very soft inflation could lead to further BoJ asset purchases
23:50	JPY	GDP Annualized (1Q P)	3.5%	-0.7%
23:50	JPY	Gross Domestic Product (QoQ) (1Q P)	0.9%	-0.2%
23:50	JPY	Nominal GDP (QoQ) (1Q P)	1.0%	-0.5%
23:50	JPY	GDP Deflator YoY (1Q P)	-1.5%	-1.8%

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

EMERGING MARKETS & SCANDIES 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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