FOREX: Dollar: What was the Catalyst for the Dollar Biggest Rally in Six Months and Will NFPs Keep it Going?

A long overdue correction was finally played out by the heavily battered dollar through Thursday's session. For the short-term bullish trader, the ‘why' is of little concern as move has been made.

• Dollar: What was the Catalyst for the Dollar Biggest Rally in Six Months and Will NFPs Keep it Going?
• Euro Collapses as the ECB's Neutral Stance Pull Rate Expectations Back to Earth
• British Pound Advances Against Euro and Aussie Dollar as the BoE Maintains its Bearings
• Australian Dollar Stages a Convincing Recovery on RBA Commentary, Stabilizing Risk Trends
• Canadian Bulls Looking for Strong Employment Data to Support a Rebound in Risk Appetite
• Gold Suffers its Worst Tumble Since November on Profit Taking, Dollar Rebound

Dollar: What was the Catalyst for the Dollar Biggest Rally in Six Months and Will NFPs Keep it Going?

A long overdue correction was finally played out by the heavily battered dollar through Thursday's session. For the short-term bullish trader, the ‘why' is of little concern as move has been made. However, for those that want to gauge the greenback's course beyond the breakout effort, the fundamental catalyst behind the biggest one-day rally since October 19th is an imperative assessment. Running down the headlines for the trading session, there is no lack of potential catalysts. The economic docket provided a potentially easy explanation for the currency's sudden rally. The release of the April 30th initial jobless claims happened to coincide with the sudden reversal for EURUSD and broad dollar-bid that was noted across the board. The 474,000 fillings on an annual basis for unemployment benefits marks the second biggest miss (bearish) for the series on record; which could have theoretically undermined expectations for growth and tomorrow's Non-Farm Payrolls and growth in general, thereby playing to the dollar's safe haven status. Yet, that assumption is dismissed when we look at the performance of the more risk-sensitive S&P 500 during the same period. The equities index was virtually unmoved after the release of the data.

A fourth-consecutive drop from capital markets through Thursday's close certainly added to the greenback's latent appeal. Yet, the bullish momentum the currency enjoyed through the session would not come through the traditional channel of risk appetite. Neither would the outlook for tightening monetary policy and interest rates play to the dollar's favor – though there was certainly a spark on that front as well. Voting Fed member Narayana Kocherlakota voiced a hawkish outlook that seems to place the central banker at the extreme of the monetary policy spectrum. A forecast of core inflation for 2011 reaching 1.5 percent just happened to fit the level he deemed necessary to spur his vote for a hike. Indeed, Kocherlakota said the Fed needed to “prepare” to raise rates; and that he supported “modest” increase in rates this year. We may see a bump in the rate forecast measured through index swaps; but for spot traders, this single voice won't bring a hike any closer.

If the dollar's usual principal drivers (risk appetite and yield expectations) weren't the key driver for price action; then what sparked the dollar's incredible rally. In fact, sentiment and rates were at the core of the move; but it wasn't the dollar that inspired the fundamental churn. The ECB rate decision was the top event risk for the day; and news that the policy authority was holding its bearing weighed the yield outlook and leverage building fundamental troubles for the greenback's primary catalyst. In essence, this was currency schadenfreude. If we consider that EURUSD was the foundation for the breakout move; then follow through for the dollar may be difficult to carry. That sets the scene for the upcoming NFPs release and the impact it can have on the dollar. The markets have become very acclimated to the general trend of US labor markets; and significant surprises at this point will carry offsetting effects between the currency's negative correlation to risk appetite and the influence on rate expectations (as employment is a key Fed mandate). It is important not to become too wrapped up in the NFP impact.

Related:Discuss the Dollar in the DailyFX Forum, John's Video: Will EURUSD and GBPUSD Continue to Fall Off after the NFPS?

Euro Collapses as the ECB's Neutral Stance Pull Rate Expectations Back to Earth

No one would miss the plunge from EURUSD Thursday, but this euro tumble was not isolated to its primary counterpart. The primary currency tumbled across the board regardless of whether its pairing was against safe haven (dollar and yen), high-yield (Aussie and Kiwi dollars) or regional equivalent (pound and franc). That suggests that the source of this fundamental hit was from the euro itself. The trigger for this dramatic decline was the European Central Bank's rate decision. For the uninitiated trader, it may seem confusing why the currency would sell off when the monetary policy essentially left everything unchanged and President Jean Claude Trichet's commentary suggested the group was still leaning towards hikes through the future. However, the market isn't simply judging the change in approach form one monetary policy meeting to the next. Expectations play an even greater role in this scenario than actual results. Weeks ago, we had seen the 12-month interest rate outlook for ECB policy drop off after the group put in for its first hike; but the euro held off from making a corresponding retracement. Yet, with rhetoric suggesting the next meeting would be another pass, the blind yield-run seems to be running out of steam.

British Pound Advances Against Euro and Aussie Dollar as the BoE Maintains its Bearings

What a contrast between the reaction to an ECB decision to maintain policy and the BoE coming to the same conclusion. Where the euro plunged, the sterling held fast and actually appreciated against a few counterparts. Where speculation was still skewed to the hawkish pole for the shared currency; there was little expectation for the MPC to deliver anything of value. Without a statement to offer transparency on the BoE's outlook and expectations, there was nothing to move on. That said, next week's Quarterly Inflation report could be a market-moving follow up.

Australian Dollar Stages a Convincing Recovery on RBA Commentary, Stabilizing Risk Trends

As we have rolled into Friday's Asian trading session, we have seen the strong dollar rally and risk aversion move fade somewhat to allow profit taking. However, compared to EURUSD's mild uptick, AUDUSD has put in for a full-blown rally. This move has been helped substantially by an RBA statement that suggested higher rates would “likely be required at some point.” Not really a revelation; but it came at the right time.

Canadian Bulls Looking for Strong Employment Data to Support a Rebound in Risk Appetite

This may be a ‘Non-Farm Payrolls Friday' that doesn't fully distract the market from Canada's corresponding data release. Following the disappointment of the GDP figures from last week and Ivey PMI of this past session, along with the investor-friendly implications of the recent election, we have a market eager for guidance. A bullish jobs change outcome is tempered somewhat from the forecast; so watch oil as well.

Gold Suffers its Worst Tumble Since November on Profit Taking, Dollar Rebound

Though it wasn't as dramatic as oil's colossal fall, gold put in for its own remarkable collapse. The weight of the hikes to margin on silver futures was already weighing the more expensive metal; so the addition of a dollar rally would ensure further pain. The 2.8 percent drop tallies the worst four-day performance since December 2009. There is a lot of passive capital here which can be unwound; but that would be a bet for the dollar.

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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
5:45	CHF	Unemployment Rate (APR)	3.3%	3.4%	Falling unemployment rate suggest Swiss recovery, though franc not expected to move
5:45	CHF	Unemployment Rate s.a. (APR)	3.2%	3.3%
6:45	EUR	French Government Balance (euros) (MAR)		-28.0B	Falling spending in March may result in lower government balance
6:45	EUR	French Trade Balance (euros) (MAR)	-6500M	-6553M
8:30	GBP	PPI Input n.s.a. (MoM) (APR)	1.6%	3.7%	Lower expected purchasing price index across the board supports a prolonged interest rate hold and policy hold by the Bank of England. Added with concerns of weaker economy, might push British pound even lower
8:30	GBP	PPI Input n.s.a. (YoY) (APR)	16.4%	14.6%
8:30	GBP	PPI Output n.s.a. (MoM) (APR)	0.7%	0.9%
8:30	GBP	PPI Output n.s.a. (YoY) (APR)	5.1%	5.4%
8:30	GBP	PPI Core n.s.a. (MoM) (APR)	0.3%	0.4%
8:30	GBP	PPI Core n.s.a. (YoY) (APR)	3.0%	3.0%
10:00	EUR	German Industrial Prod n.s.a. w.d.a. (YoY) (APR)	10.3%	14.8%	Industrial production may follow on heels of lower PMI yesterday
10:00	EUR	German Industrial Prod s.a. (MoM) (APR)	0.5%	1.6%
11:00	CAD	Full Time Employment Change (APR)		90.6	Full time employment change expected to rise, while part time employment falls, underlining better long term expectations for Canadian economy
11:00	CAD	Participation Rate (APR)	66.9	66.9
11:00	CAD	Unemployment Rate (APR)	7.7%	7.7%
11:00	CAD	Net Change in Employment (APR)	20.0K	-1.5K
11:00	CAD	Part Time Employment Change (APR)	65	-92.1
12:30	USD	Change in Private Payrolls (APR)	200K	230K	Slowing change in US employment figures point to more cautious recovery; may point to longer interest rate hold by Federal Reserve
12:30	USD	Avg Hourly Earning All Employees (MoM) (APR)	0.2%	0.0%
12:30	USD	Change in Manufacturing Payrolls (APR)	20K	17K
12:30	USD	Change in Household Survey Employment (APR)		291
12:30	USD	Change in Non-farm Payrolls (APR)	190K	216K
12:30	USD	Avg Hourly Earning All Employees (YoY) (APR)	1.8%	1.7%
12:30	USD	Avg Weekly Hours All Employees (APR)	34.3	34.3
12:30	USD	Unemployment Rate (APR)	8.8%	8.8%
19:00	USD	Consumer Credit (MAR)	$5.0B	$7.617B	Less borrowing despite low interest could result in lower spending

GMT	Currency	Upcoming Events & Speeches
14:00	USD	Fed's Dudley to Speak at Regional Economic Briefing in NYC

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	1.4829	1.6486	81.03	0.8614	0.9527	1.0861	0.7996	120.14	133.58
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	11.5686	1.5341	6.6385	7.7654	1.2280		Spot	6.0519	5.0290	5.2792
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	1.4960	1.6734	81.58	0.8706	0.9592	1.0999	0.8106	121.36	136.40
Resist 1	1.4894	1.6610	81.31	0.8660	0.9560	1.0930	0.8051	120.75	134.99
Pivot	1.4825	1.6537	81.00	0.8628	0.9509	1.0884	0.8011	119.98	133.97
Support 1	1.4759	1.6413	80.73	0.8582	0.9477	1.0815	0.7956	119.37	132.56
Support 2	1.4690	1.6340	80.42	0.8550	0.9426	1.0769	0.7916	118.60	131.54

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	1.5015	1.6647	81.99	0.8723	0.9618	1.1009	0.8108	121.96	135.58
Resist. 2	1.4969	1.6607	81.75	0.8695	0.9595	1.0972	0.8080	121.50	135.08
Resist. 1	1.4922	1.6567	81.51	0.8668	0.9572	1.0935	0.8052	121.05	134.58
Spot	1.4829	1.6486	81.03	0.8614	0.9527	1.0861	0.7996	120.14	133.58
Support 1	1.4736	1.6405	80.55	0.8560	0.9482	1.0787	0.7940	119.23	132.58
Support 2	1.4689	1.6365	80.31	0.8533	0.9459	1.0750	0.7912	118.78	132.08
Support 3	1.4643	1.6325	80.07	0.8505	0.9436	1.0713	0.7884	118.32	131.58

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

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