Dollar’s Week Starts with a Potential Fiscal Crisis, Ends with NFPs

The dollar and underlying risk trends ended the week under extraordinary duress – as they should. The deficit impasse that the markets have been ringing their hands over for the past few weeks is now heading into the final stretch with two days of market down-time to shorten the trading calendar.

• Dollar's Week Starts with a Potential Fiscal Crisis, Ends with NFPs
• Euro Docket Heavy with EU Crisis, ECB Decision, Italian GDP on Deck
• British Pound Will Find Little Encouragement from BoE Meeting
• Australian Dollar will Put Inflation Figures to the Test with RBA Decision
• New Zealand Dollar Rally Continues Sans Risk Trends, Rate Potential
• Japanese Yen Tapped into Anti-Dollar Sentiment, Ignoring BoJ Decision
• Gold Ready for Definitive Breakout with Deficit Clock Running Out

Dollar's Week Starts with a Potential Fiscal Crisis, Ends with NFPs

The dollar and underlying risk trends ended the week under extraordinary duress – as they should. The deficit impasse that the markets have been ringing their hands over for the past few weeks is now heading into the final stretch with two days of market down-time to shorten the trading calendar. Through a tumultuous final 24 hours of the week, the Dow Jones FXCM Dollar Index (ticker = USDollar) managed yet another record low close (at 9,346) after carving out an exceptionally volatile day. The primary catalysts for the greenback at this point are well known; but their respective outcomes are wholly unpredictable. As we head into a week where both the US budget deadline and non-farm payrolls stand out on the docket, one thing is certain: we are in for incredible volatility.

Without doubt, the most prominent concern for those trading the dollar, equities, commodities, bonds or any other asset is whether the US government can find a compromise on its budget policy by the Tuesday deadline. According to the Treasury, the country will likely fall short on its payments come August 2nd after exhausting all of their short-term facilities. Through Friday's market close, the Republican-led House of Representatives managed to win enough votes to pass the Boehner-led bill only to see it immediately shot down when it was brought up to vote in the Senate. Debate is expected to continue over the weekend; but there seems to be little headway in compromise. In the event that Tuesday passes without a solution; it has been suggested that the timeline can be pushed back a few days with help from the Fed and Treasury. That said, the confidence impact such a move would have on capital markets and credit ratings would certainly leverage the likelihood of a downgrade. If the markets open Monday without an agreement on the table, volatility will swell as investors look to retreat to safety (a problem given US Treasuries and money market funds usually fill that role). And, should this end with an air of ambiguity (perhaps just a debt ceiling increase, or a flimsy deficit plan); the relief will be seen for capital markets but the dollar will almost certainly tumble as its reserve prospects dim.

There is little doubt as to what the headline concern will be going forward; but there will be further event risk to follow the debt wave next week. Coming in at second place, we have the July non-farm payrolls. This particular reading will be colored by the unexpectedly weak 18,000 reading from June, the exceptionally weak 0.1 percent increase in personal consumption reported with the 2Q GDP figures and building stubborn rumors of QE3. Is a third quantitative easing program any more probable now than it was the day after its expiration – absolutely.

Related:Discuss the Dollar in the DailyFX Forum, John's Video: The EURUSD is the Barometer for the US Deficit and ECB Rate Decision

Euro Docket Heavy with EU Crisis, ECB Decision, Italian GDP on Deck

If we rolled back the clock two weeks, the financial headlines were dedicated to the European Union's sovereign debt troubles. Given the lack of coverage we have seen recently, some would assume that the EU's aggressive program to stabilize the region (a second bailout program for Greece, lower rates and longer maturities on rescue funds, the ability of the EFSF to recapitalize banks as well as purchase government bonds on the secondary market) has solved the problem. Yet, the more probable scenario is that the focus has shifted over to the dollar's financial problems and thereby leveled the playing field with the greenback's most appropriate reserve alternative. This will continue to be the case in the coming week as the dollar faces a definitive countdown. Nevertheless, we should keep a close eye on developments. Further downgrades are an ongoing threat – especially after Spain was put on review by Moody's this past Friday. We will finally see an economic review on whether troubles are spreading to the EU core with the Italian 2Q GDP figures. And, the ECB will indicate whether they will exacerbate the problem.

British Pound Will Find Little Encouragement from BoE Meeting

We have come to expect little from the Bank of England as they have shown extraordinary consistency in their lax monetary policy stance. Yet, no change is a development in its own right. And, when we color it against the weak 0.7 percent annualized pace of growth the economy reported earlier this week; no change can be interpreted as economic support and further reason to move away from the sterling.

Australian Dollar will Put Inflation Figures to the Test with RBA Decision

In their last meeting, the Reserve Bank of Australia saw little scope for a near-term change to their monetary policy. On the other hand, they did say that the future was contingent upon inflation pressures. This past week, headline 2Q CPI rose to a 3.6 percent clip while the ‘core' reading accelerated to a 2.7 percent clip. So, while there may be no hike this time around; there is a good chance of a change to future intentions.

New Zealand Dollar Rally Continues Sans Risk Trends, Rate Potential

Through the end of this past week, RBNZ Governor Alan Bollard undermined the outlook for rate hikes beyond a return of the 50 bps that was cut in March and risk appetite tumbled. Despite this unfavorable mix, though, the New Zealand dollar charged to a fresh record high against the greenback. We could say that is a reflection of greenback weakness; but the kiwi similarly rallied against its Australian counterpart.

Japanese Yen Tapped into Anti-Dollar Sentiment, Ignoring BoJ Decision

Yet another rate decision in the coming week, the Bank of Japan is scheduled to announce its monetary policy decision sometime Friday morning. There is very unlikely that they change anything given their tentatively encouraging outlook for economic activity the past few months against the backdrop of long-term hardships ahead. Instead, yen traders should look at the currency as a funding currency in risk currents.

Gold Ready for Definitive Breakout with Deficit Clock Running Out

With the weekend draining the markets and investors biting their nails as they await a clear sign from the US budget debate; the appeal of gold as a safe haven and alternative reserve for wealth looked particularly appealing. The metal absorbed a considerable amount of the capital fleeing the greenback to close at a fresh record high. If a deficit agreement isn't reached soon; expect to see the metal much hiver very quickly.

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ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
23:01 (Sun)	GBP	Lloyds Business Barometer (JUL)		36	Gauge has been declining due to further government tightening
23:30 (Sun)	AUD	AiG Performance of Manufacturing Index (JUL)		52.9	Preliminary figure could suggest direction of AU economy
1:00	NZD	ANZ Commodity Price (JUL)		-1.2%	Could be capped by stronger NZD
1:00	CNY	PMI Manufacturing (JUL)		50.9	Reading below 50 would mean shrinking
1:00	AUD	HIA New Home Sales (MoM) (JUN)		-0.2%	Home sales continues to be in decline
2:30	CNY	HSBC Manufacturing PMI (JUL)		50.1	Expected to follow official data
5:00	JPY	Vehicle Sales (YoY) (JUL)		-23.3%	Retail demand may not translate to sales
7:30	CHF	SVME-Purchasing Managers Index (JUL)		53.4	Swiss PMI indicates domestic health
7:45	EUR	Italian PMI Manufacturing (JUL)		49.9	New PMI Manufacturing readings suggests EU economy cautiously slugging along
7:50	EUR	French PMI Manufacturing (JUL F)	50.1	50.1
7:55	EUR	German PMI Manufacturing (JUL F)	52.1	52.1
8:00	EUR	Italian Unemployment Rate (SA) (JUL P)		8.1%	Increase may cause more concern
8:00	EUR	Euro-Zone PMI Manufacturing (JUL F)	50.4	50.4	Total manufacturing also shows uncertain
8:30	GBP	PMI Manufacturing (JUL)		51.3	Slows slight, careful growth
9:00	EUR	Euro-Zone Unemployment Rate (JUL)		9.9%	Unemployment expected to be stable
14:00	USD	Construction Spending (MoM) (JUL)	-0.1%	-0.6%	Slight recovery could help real estate
14:00	USD	ISM Manufacturing (JUL)	55.4	55.3	Mixed prices, continued weakness may put less pressure on Fed to raise rates in the near term
14:00	USD	ISM Prices Paid (JUL)	63.5	68
16:00	EUR	Italian New Car Registrations (YoY) (JUL)		-1.7%	Correlated with consumer spending
17:00	EUR	Italian Budget Balance (euros) (YTD) (JUL)		-43.5B	Current balance expected to have surplus on aggressive austerity measures
17:00	EUR	Italian Budget Balance (euros) (JUL)		1.3B
22:45	NZD	Labor Cost Private Sector (QoQ) (Q2)		0.3%	New Zealand labor changes could point to direction of economy, rate hikes
22:45	NZD	Average Hourly Earnings (QoQ) (Q2)		0.4%
22:45	NZD	Private Wages ex Overtime (QoQ) (Q2)		0.4%
23:50	JPY	Monetary Base (YoY) (JUL)		17.0%	Base could decrease as economy slows

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist 2	1.5160	1.6600	86.00	0.8900	1.0275	1.1800	0.9020	118.00	146.05
Resist 1	1.5000	1.6475	81.50	0.8550	1.0000	1.1000	0.8750	113.50	140.00
Spot	1.4310	1.6340	77.79	0.8017	0.9510	1.0985	0.8685	111.32	127.11
Support 1	1.4000	1.5935	77.50	0.8000	0.9425	1.0400	0.7745	109.00	125.00
Support 2	1.3700	1.5750	76.25	0.7900	0.9055	1.0200	0.6850	106.00	119.00

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

Currency	USD/MXN	USD/TRY	USD/ZAR	USD/HKD	USD/SGD		Currency	USD/SEK	USD/DKK	USD/NOK
Resist 2	13.8500	1.8235	7.4025	7.8165	1.3650		Resist 2	7.5800	5.6625	6.1150
Resist 1	12.5000	1.7425	7.3500	7.8075	1.3250		Resist 1	6.5175	5.3100	5.7075
Spot	11.7252	1.6769	6.7454	7.7922	1.2022		Spot	6.3342	5.2055	5.4144
Support 1	11.5200	1.6500	6.5575	7.7490	1.2000		Support 1	6.0800	5.1050	5.3040
Support 2	11.4400	1.5725	6.4295	7.7450	1.1800		Support 2	5.8085	4.9115	4.9410

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist 2	1.4469	1.6404	78.22	0.8075	0.9546	1.1106	0.8780	112.69	127.79
Resist 1	1.4389	1.6372	78.00	0.8046	0.9528	1.1046	0.8732	112.00	127.45
Pivot	1.4322	1.6333	77.82	0.8018	0.9493	1.1014	0.8707	111.42	127.09
Support 1	1.4242	1.6301	77.60	0.7989	0.9475	1.0954	0.8659	110.73	126.75
Support 2	1.4175	1.6262	77.42	0.7961	0.9440	1.0922	0.8634	110.15	126.39

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.4497	1.6496	78.68	0.8121	0.9604	1.1126	0.8803	112.93	128.64
Resist. 2	1.4450	1.6457	78.45	0.8095	0.9581	1.1090	0.8774	112.53	128.26
Resist. 1	1.4403	1.6418	78.23	0.8069	0.9557	1.1055	0.8744	112.13	127.87
Spot	1.4310	1.6340	77.79	0.8017	0.9510	1.0985	0.8685	111.32	127.11
Support 1	1.4217	1.6262	77.35	0.7965	0.9463	1.0915	0.8626	110.51	126.35
Support 2	1.4170	1.6223	77.13	0.7939	0.9439	1.0880	0.8596	110.11	125.97
Support 3	1.4123	1.6184	76.90	0.7913	0.9416	1.0844	0.8567	109.71	125.59

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

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