FOREX: Dollar Finds Little Encouragement in ISM Factory Report, but Currency Quick to Follow Risk Aversion

It wasn't a very convincing performance, but the US Dollar Index put in for its first positive daily close in six trading sessions. Measuring conviction, we can see in Dollar Index futures that volume pick up from Friday's lull; but the rebound in activity was far from the robust performance that would indicate a changing of the guard.

• Dollar Finds Little Encouragement in ISM Factory Report, but Currency Quick to Follow Risk Aversion
• Euro Locked on Upcoming ECB Decision as Officials Confident in Portugal Bailout, No Greek Restructure
• British Pound Falls Despite Holiday Thanks to BoE Governor King's Testimony on Monetary Policy
• Australian Dollar Unlikely to Find Guidance Meaningful Changes for Monetary Policy from RBA
• New Zealand Dollar Wavers after Moody's Warns Clarity Needed in May 19th Budget
• Japanese Yen Strengthens Despite the Passage of the 4 Trillion Yen Rebuilding Budget
• Gold and Silver Suffer Sharp Corrections as Margin Hikes Cut into Speculative Activity

Dollar Finds Little Encouragement in ISM Factory Report, but Currency Quick to Follow Risk Aversion

It wasn't a very convincing performance, but the US Dollar Index put in for its first positive daily close in six trading sessions. Measuring conviction, we can see in Dollar Index futures that volume pick up from Friday's lull; but the rebound in activity was far from the robust performance that would indicate a changing of the guard. It comes a little surprise that there is little effort to reverse established trends and that the market is staid in general. While there was event risk on the docket and cross-market winds were picking up somewhat; neither of these catalysts really play to the greenback's true fundamental concerns: yield expectations and risk appetite trends. For underlying investor sentiment, the S&P 500 and Dow Jones Industrial Average reversed sharp opening rallies to officially close the market in the red for the first time in a week. This is where much of the currency's guidance would come from – for direction as well as the lack of momentum.

As for the event risk through the opening 24 hours of the new week, a general improvement in the data offers the greenback little solace. From the docket, the ISM Manufacturing report for April printed a better-than-expected reading of 60.4. Technically, this was a cooler pace than the previous month's reading; but the headline activity report was barely off its highest level since May 2004 – a comparison that also extends to consistency of performance as the barometer has held above the 60-mark for four consecutive months. We could look at the breakdown for strong readings for unfilled orders, inventories and exports; but the economic implications are already largely tapped out. The factory sector is already a prominent contributor to economic output according the previous GDP readings. What the market is looking for now is a recovery in consumer spending, real estate, and other critical sectors to revive the growth debate as a fundamental driver. That said, we should still take note of the survey's ‘Prices Paid' component – a measure of upstream inflation. The highest reading since July of 2008, the rate hawks among us are still finding reasonable grounds to argue for rate hikes – though whether the Fed pays attention or not is what matters. The other notable development for the day was the release of the Fed's quarterly Senior Loan Survey. According to the policy authority, banks eased lending standards in the first quarter. This is another slow shift in credit conditions for the Fed to contemplate; but once again, nothing to move on.

Related:Discuss the Dollar in the DailyFX Forum, John's Video: EURUSD a Pair Opportunity against GBPUSD, AUDJPY and NZDJPY

Euro Locked on Upcoming ECB Decision as Officials Confident in Portugal Bailout, No Greek Restructure

We should keep a close eye on the fundamental balance between risk and reward for the euro this week. And, while there is still some time before the ECB rate decision due this Thursday, the scales could still tip before the policy announcement and subsequent commentary from bank President Trichet cross the wires. Recent developments give us something to consider for the risk column. This past Friday, Ireland lowered its growth forecasts for 2011 (from 1.7 percent to 0.7 percent) and 2012 (from 3.2 percent to 2.5 percent) while also raising its deficit projections for 2011 (from 5.8 percent to 7.2 percent) and 2012 (from 2.8 percent to 4.7 percent). Just as discouraging, Spain reported a jobless rate above 21 percent and the sharpest drop in retail sales in two years. Speculation was at the forefront Monday. On one side, we had the EU's Rehn saying Spain had decoupled from its Greek, Irish and Portuguese neighbors; and that stress was largely contained. In contrast, the True Finns in Finland are posturing for a potentially critical block of Portugal's bailout while Trichet said inflation expectations were well “anchored.”

British Pound Falls Despite Holiday Thanks to BoE Governor King's Testimony on Monetary Policy

We would have expected a quiet day for the pound Monday as the market was London markets were closed for the holiday. Nonetheless, the sterling was still active and the fundamental wires were still running. The Hometrack House survey reading for April (posting the first time the indicator hasn't contracted in 10 months) was a write off as the indicator itself is lagging. Far more interesting was Bank of England Governor King's testimony to the EU Parliament. The central bank said he considers the high debt levels of the UK a “massive” economic challenge that would be exacerbated by higher rates. He went so far as to say this was the “main reason” why rates have not been hiked.

Australian Dollar Unlikely to Find Guidance Meaningful Changes for Monetary Policy from RBA

Quickly coming up to the RBA rate decision, the markets aren't placing much into speculation. The markets are pricing in no chance of a change to the benchmark this meeting; and the 12 month forecast is still far from certain about anything greater than another quarter-percent tightening this time next year. If you are looking for activity after this release, look for the highest yield differentials and other currencies with rate decisions.

New Zealand Dollar Wavers after Moody's Warns Clarity Needed in May 19th Budget

The New Zealand dollar retreated early in Tuesday's trading session after the first quarter average hourly earnings report fell short of the market consensus and further diminished hopes of a near-term rate hike from the RBNZ. Far more concerning those was Moody's warning that the May 19th budget would be very important to stabilizing the country's financial health – making allusions to the kiwi's sovereign credit rating.

Japanese Yen Strengthens Despite the Passage of the 4 Trillion Yen Rebuilding Budget

The Upper House of the Diet unanimously passed the 4 trillion yen ($49 billion) rebuilding budget early Monday. This is a step that the market was prepared for; but the long-term implications are still discouraging. This is likely only the first in a series of programs to help the economy recover from the devastating earthquake; and future iterations will likely require bond sales. Larger deficits are highly likely.

Gold and Silver Suffer Sharp Corrections as Margin Hikes Cut into Speculative Activity

Gold endured its sharpest daily decline since March 15th while silver suffered its biggest daily decline on recent record Monday. The metal's market were marginally influenced by a slip in risk appetite and tepid uptick in the US dollar. The real impact was through margin increases. A third hike, 13 percent hike in the initial capital requirements to trade silver (the increase in a week). Will speculators check out?

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

ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
1:00	CNY	China Non-manufacturing PMI (APR)		60.2	Services index expected lower as PBoC tightening continues
4:30	AUD	Reserve Bank of Australia Rate Decision (MAY 3)	4.75%	4.75%	RBA expected to hold rates as many inflation, housing, spending data and surveys lower than previous and expected for April
8:30	GBP	Purchasing Manager Index Manufacturing (APR)	57	57.1	British manufacturing sector still facing headwinds
9:00	EUR	Euro-Zone Producer Price Index (MoM) (MAR)	0.7%	0.8%	PPI expected flat, cutting changes of further ECB rate increases soon
9:00	EUR	Euro-Zone Producer Price Index (YoY) (MAR)	6.6%	6.6%
10:00	GBP	CBI Reported Sales (APR)	15	15	National retail sales expected flat
14:00	USD	Factory Orders (MAR)	2.0%	-0.1%	Large manufacturing seen to benefit from more orders in March. Vehicle sales, a related component, seen flat
21:00	USD	Total Vehicle Sales (APR)	13.0M	13.06M
21:00	USD	Domestic Vehicle Sales (APR)	9.9M	9.94M
22:45	NZD	Building Permits (MoM) (MAR)		-9.7%	May recover from reconstruction
22:45	NZD	Net Migration s.a. (MAR)		470	Migration may increase as outlook for NZ government seen turning
23:01	GBP	BRC Shop Price Index YoY (APR)		2.4%	Lower index may be rate dovish
23:30	AUD	AiG Performance of Service Index (APR)		46.5	Services currently near historic highs, driven by growing economy

GMT	Currency	Upcoming Events & Speeches
12:30	USD	Fed's Hoenig Speaks to Community Bankers in Washington

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	1.6750	89.00	0.9345	1.0275	1.1800	0.8400	127.60	146.05
Resist 1	1.5000	1.6600	86.00	0.8900	1.0000	1.1000	0.8215	125.90	140.00
Spot	1.4846	1.6681	81.27	0.8642	0.9494	1.0958	0.8075	120.65	135.56
Support 1	1.4000	1.6200	80.00	0.8600	0.9500	1.0400	0.7825	115.70	125.00
Support 2	1.3700	1.5750	75.00	0.8500	0.9055	1.0200	0.6850	105.50	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	1.6575	7.4025	7.8165	1.3650		Resist 2	7.5800	5.6625	6.1150
Resist 1	12.5000	1.6300	7.3500	7.8075	1.3250		Resist 1	6.5175	5.3100	5.7075
Spot	11.5068	1.5203	6.5854	7.7657	1.2220		Spot	6.0107	5.0234	5.2344
Support 1	11.5200	1.5040	6.5575	7.7490	1.2145		Support 1	6.0800	5.1050	5.3040
Support 2	11.4400	1.4725	6.4295	7.7450	1.2000		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	1.4976	1.6782	82.01	0.8726	0.9535	1.1054	0.8166	121.54	136.47
Resist 1	1.4911	1.6731	81.64	0.8684	0.9514	1.1006	0.8120	121.10	136.01
Pivot	1.4837	1.6688	81.32	0.8655	0.9481	1.0964	0.8077	120.58	135.67
Support 1	1.4772	1.6637	80.95	0.8613	0.9460	1.0916	0.8031	120.14	135.21
Support 2	1.4698	1.6594	80.63	0.8584	0.9427	1.0874	0.7988	119.62	134.86

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	1.5028	1.6839	82.21	0.8749	0.9584	1.1105	0.8187	122.44	137.57
Resist. 2	1.4982	1.6800	81.97	0.8722	0.9561	1.1068	0.8159	121.99	137.07
Resist. 1	1.4937	1.6760	81.74	0.8695	0.9539	1.1031	0.8131	121.54	136.56
Spot	1.4846	1.6681	81.27	0.8642	0.9494	1.0958	0.8075	120.65	135.56
Support 1	1.4755	1.6602	80.80	0.8589	0.9449	1.0885	0.8019	119.76	134.55
Support 2	1.4710	1.6562	80.57	0.8562	0.9427	1.0848	0.7991	119.31	134.05
Support 3	1.4664	1.6523	80.33	0.8535	0.9404	1.0811	0.7963	118.86	133.55

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

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