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Wednesday, 25 May 2011
Dollar and Yen Retreat as Rick Appetite Returns
A rebound in risk appetite spurred by stronger US economic data helped to weaken the safe haven currencies of the US dollar and the yen. The dollar block currencies recovered off of previous lows following Monday's flair up of the Greek debt crisis and weak Chinese economic data.
USD - US Housing Numbers Helps Risk Recovery
The dollar weakened following the release of better than expected US new home sales. The April numbers showed an increase of 7.3% m/m to 323K from the March numbers which were revised higher to an 8.3% increase to 301K. The number of homes available on the market dropped to its lowest level in one year.
On the back of the stronger US data the dollar weakened yesterday versus the euro and the dollar block currencies. The EUR/USD climbed as high as 1.4132 after trading as low as 1.4033, before pulling back to close at 1.4057. The AUD/USD rose to a high of 1.0581 before falling back to 1.4096. The NZD/USD shot above the 0.8000 level on the back of rising inflation expectations, moving as high as 0.8014 before pulling back to 0.7932. The next resistance level for the pair rests at the May high of 0.8120. Global bourses were mixed with the Nikkei rising 0.2%, the British FTSE up 0.4%, and the S&P finished lower by -0.08%. Commodities were higher with crude oil surging almost 2% following bullish report from Goldman Sachs.
Today traders will once again be focusing on US economic data with the release of US core durable goods today at 12:30 GMT. Market expectations are for an increase of 0.7% and a result above expectations may feed into renewed dollar selling with an improved risk appetite. However, traders may want to be cautious as today's rebound in risk appetite could prove temporary as the Greek debt crisis remains in the headlines in the FX realm.
EUR - German Economic Data Helps Euro Climb, Sterling Bounces at Trend Line
The euro traded higher following better than expected German economic data as the Ifo Business Climate survey remained at 114.2 on consensus expectations of 113.9. The euro briefly dipped following disappointing European industrial orders, -1.8% on consensus expectations of -1.2%. The 17-nation currency fell following the Greek political opposition declaring their obstruction to an increase in austerity measures. However, the opposition party did note they were open to an increase in state asset sales which is a step in the right direction for securing additional EU/IMF aid.
Yesterday's increasing risk appetite was enough to keep the euro in the positive versus the dollar but the euro failed to make any headway in the crosses. The EUR/GBP rose as high as 0.8750 but finished the day lower at 0.8690. The EUR/CHF closed lower at 1.2358 from 1.2449.
Sterling firmed yesterday, finding buyers due to the increase in risk appetite and attractive technical levels. The GBP/USD initially declined to 1.6070 but received a bounce as this price coincides with the bullish trend line off of the May 2010 lows. Sterling could receive further support ahead of today's revised GDP report. Resistance for the GBP/USD comes in at 1.6320 from the broken trend line off of January low.
JPY - Yen Falls on Reduced Safe-Haven Buying
The increase in risk appetite kept the yen on its back foot yesterday as Japanese fundamentals continue to point to a worsening economy. Growth prospects for Japan are waning and this was highlighted by Moody's when the ratings agency signaled a warning for Japan's credit rating. The economic assessment earlier in the week for the month of May did little to increase investor confidence in the Japanese economy which likely fell into a recession prior to the earthquake and tsunami on March 11th. As such the yen should remain on its back foot barring a catalyst that would cause a shift back into lower yielding safe-haven assets such.
Yesterday the USD/JPY rose to a high of 82.21 from 81.79 before settling back to 81.92. Further USD/JPY targets to the upside may be retracement levels from the April to May move at 82.50 followed by 83.25.
Oil - Bullish Report Spurs Crude Oil Price Increase
A bullish crude oil research report from investment bank Goldman Sachs helped to spur gains in spot crude oil prices. The bank is known for making recommendations in the commodity markets as a bullish report in 2008 calling for $200 barrel oil helped to increase the frenzy in commodity markets.
Goldman raised its forecast for West Texas Intermediate crude to $108 from $100. This helped to spur gains in spot crude oil prices. Yesterday the price rose as high as $100 before retreating back to close the day up at $98.77.
The rebound in yesterday's “risk-on” trade combined with the bullish crude oil report helped boost crude oil prices but traders may want to remain cautious as future price moves should be influenced in particular by the European debt crisis and any impact this may have on global growth expectations.
Momentum continues to shift to the downside with weekly stochastics falling sharply. Initial support was found at the 100-day moving average and the next major levels that come into play are between 1.3910 and 1.3860. The former is the 50% retracement level from the January to May move. The latter is a previous support level from mid-March. A breach here would target 1.3675 where the 200-day moving average and the 61.8% retracement levels coincide. Resistance comes in at 1.4130 followed by the 50-day moving average at 1.4340.
Cable has received a bounce the last two days off of the rising trend line from the May 2010 low. A move back to this key support level and a potential long position could be initiated with a tight stop below the trend line. Support is found at the 200-day moving average at 1.5935 which coincides with the March low. Initial resistance is found at 1.6320 from the broken trend line off of January low.
The yen has continued to weaken since the pair put in a low in early May. Weekly stochastics are turning higher, indicating future appreciation in the pair. A move higher would target the retracement levels from the April to May move at 82.50 followed by 83.25. Support comes in at 81.30 and the May low at 79.50
The weekly high at 0.8890 coincided with the trend line falling off the February high. Traders may want to be cautious at this level as both momentum and stochastics on the daily chart indicate further potential gains. The pair could find resistance near the 50-day moving average at 0.8930. The last time the USD/CHF traded at this level was the beginning of the year. Support is found at 0.8745.
The Wild Card
Yesterday's $1.50 surge in the price of spot silver helped the commodity close above the short term resistance level at $36.50. Forex traders will be looking to target the next major resistance at $39.50. Stops should be found under the $34 level.