FOREX: Trust in a Dollar Rally is Difficult to Muster without Wholesale Risk Aversion

It was a contentious for the dollar to end the week. The currency's most liquid pairing – EURUSD – closed out the period with what seemed a critical bearish break that would seem to open the door to significant follow through on a quickly building trend. However, fundamental traders should have noted something was amiss.

• Dollar: Trust in a Dollar Rally is Difficult to Muster without Wholesale Risk Aversion
• Euro at the Top of The Fundamental Risk List as the EU Discusses Greece, Portugal
• British Pound: Will the BoE Minutes Help Spur Rate Speculation This Time Around?
• Canadian Dollar Dominates for Event Risk but Volatility Expectations Still Set Low
• Australian Dollar Traders will Pay a Little More Attention to the RBA's Wrap Up
• Japanese Yen Grows Dangerously Close to Testing the G7's Resolve for ‘Stability'
• Gold On the Verge of Deeper Reversal – Much Like the Position for Equities

Dollar: Trust in a Dollar Rally is Difficult to Muster without Wholesale Risk Aversion

It was a contentious for the dollar to end the week. The currency's most liquid pairing – EURUSD – closed out the period with what seemed a critical bearish break that would seem to open the door to significant follow through on a quickly building trend. However, fundamental traders should have noted something was amiss. The most immediate concern was the general lack of meaningful follow through across the other majors. Sure GBPUSD and AUDUSD set new six- and four-week lows on an intraday basis respectively; but these are not definitive signs of conviction. Furthermore, USDJPY would show a shift in favor of the market's favored funding currency – denoting a fundamental driver that rested outside the pure confines of a dollar advance.

With the high-yield commodity bloc sliding against the greenback, European currencies retreating and the yen advancing; we are shown the right mix of fundamentals to suggest that Friday's momentum was likely sourced through risk aversion trends. Indeed, when we check our favored benchmark for sentiment – the S&P 500 – we see that there was a sharp decline on the day. That said, this benchmark for investor sentiment did not make the same headway that EURUSD did. A critical bearish break was not won. And, without a primary catalyst like risk trends to provide the fuel, a major trend will be incredibly difficult (if not impossible) to generate. Looking for the economic developments to encourage a pullback in optimism at the end of this past week, we were presented with two interesting fundamental considerations that will certainly play into next week's trends: US inflation and Euro troubles.

The April CPI numbers hit a number of important fundamental points for the capital and FX markets; but these aren't the immediate concerns that will redefine the greenback's bearings. On one hand, the 3.1 percent pace of annualized, headline price growth (the fastest since September 2008) is a direct concern for interest rate speculating. This print is well above the central bank's self-described 2 percent target; but the group has made it more than clear that they will not pursue a tightening regime until they are more confident in employment growth. For dollar bulls, this is more important in timing the eventual rate hike. Another interest side effect of the inflation data and its policy slant is the impact to risk trends. Stimulus has been a significant (if not the primary) driver for speculative positioning. Higher inflation threatens an inevitable withdrawal of that accommodation and invites an overdue correction. As for the euro issues, we discuss that below.

Related:Discuss the Dollar in the DailyFX Forum, John's Video: EURUSD May Extend its Bearish Run if the S&P 500 Offers its Support

Euro at the Top of the Fundamental Risk List as the EU Discusses Greece, Portugal

The sheer liquidity behind the EURUSD's market movements fundamentally fuses the individual currencies' futures together. Through the end of this past week, fundamental activity had once again picked up owing to the expectations and reaction to the European GDP figures. As was expected, the core EU members were posting impressive growth. Germany reported its strongest pace of economic expansion since Reunification (5.2 percent) while Franc put in its own impressive read (2.2 percent). Yet, the real concern was in the periphery. And there, we would see Greece expanding a reserved 0.8 percent after a sharp downward revision in a 2.8 percent contraction the previous period and Portugal contracting 0.3 percent. Greece, Portugal and Ireland will be the topic of conversation early next week as well. The Eurogroup is scheduled to meet and discuss further accommodation to Greece's rescue (which Ireland will be watching) and the details of Portugal's bailout.

British Pound: Will the BoE Minutes Help Spur Rate Speculation This Time Around?

Typically, we watch for the BoE minutes as a meaningful view on the central bank's policy bearings. The rate decisions themselves little if any guidance as the group is naturally mum should they vote not to change rates or alter the size of the bond purchasing program. That said, we already have our bearings this time around thanks to the recently release of the Quarterly inflation report – which actually boosted the hawkish call through the inflation watch. In its stead, we will sift through the CPI and labor statistics to gauge the proximity of that first MPC hike.

Canadian Dollar Dominates for Event Risk but Volatility Expectations Still Set Low

On a global docket that is relatively light for set indicators; the Canadian dollar dominates. Two listings in particular promise significant impact on the loonie: April CPI and March retail sales. The consumption figure is a clear measure of domestic – and thereby underlying – economic health. The Canadian currency's real claim to fame though lies with its robust rate forecast; and it needs genuine support for this hawkish outlook.

Australian Dollar Traders will Pay a Little More Attention to the RBA's Wrap Up

After the last Reserve Bank of Australia rate decision, the market grew a little more hawkish on the Australian dollar's rate outlook. The balance of the commentary that accompanied the decision generally lacked a tangible hawkishness; but speculators sometimes see encouragement in unusual places. If this bullish lean is to have any traction at all, we should expect something tangible in the RBA minutes.

Japanese Yen Grows Dangerously Close to Testing the G7's Resolve for ‘Stability'

We learned this past Friday from the New York Fed that in the coordinated G7 intervention on the Japanese yen that the Fed bought $1 billion. This is a timely reminder that the largest central banks in the world stand ready to intervene on the yen's behalf should it move on to untenable extremes. However, is this an issue of position or volatility? We may find out sooner than we think should risk trends fall apart.

Gold On the Verge of Deeper Reversal – Much Like the Position for Equities

Historically, investment assets and safe havens move exactly in the opposite direction. So then why is gold threatening a progressive, bearish reversal at the same time that the S&P 500 is? The metal has gotten to the point that a heavy contingent of speculative capital has been allocated to the market; and thereby any panic of capital losses or need for liquidity will strike gold just as surely as it does equities.

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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
22:30(Sun)	NZD	Performances Services Index (MAY)		50.8	Maya performance expected to recover
22:50(Sun)	JPY	Loans and Discounts Corp YoY (MAR)		-4.4%	March data will still show weaker orders due to earthquake, but should recover according to April domestic CPI
22:50(Sun)	JPY	Machine Orders (MoM) (MAR)		-2.3%
22:50(Sun)	JPY	Machine Orders (YoY) (MAR)		7.6%
22:50(Sun)	JPY	Domestic CGPI (MoM) (APR)		0.6%
22:50(Sun)	JPY	Domestic CGPI (YoY) (APR)		2.0%
1:30	AUD	Home Loans (MAR)		-5.6%	Lending related spending might slow as interest rates hit record highs
1:30	AUD	Investment Lending (MAR)		-2.3%
1:30	AUD	Owner-occupied Home Loan Value (MAR)		-4.8%
1:30	AUD	New Motor Vehicle Sales YoY (APR)		1.9%
5:00	JPY	Consumer Confidence (APR)		38.6	Confidence faced large drop in March
8:00	EUR	Italian Trade Balance (Total EUR) (MAR)		-3633M	Deficit expected to widen further as exports drop
8:00	EUR	Italian Trade Balance (Eu EUR) (MAR)		-883M
9:00	EUR	EU CPI Core YoY (APR)		1.3%	Overall higher CPI for the entire Eurozone may prompt ECB to hike rates sooner
9:00	EUR	EU CPI MoM (APR)		1.4%
9:00	EUR	EU CPI YoY (APR)
9:00	EUR	EU Trade Balance SA (MAR)		-2.4B	Euro trade balance also expected to be in deficit
9:00	EUR	EU Trade Balance (MAR)		-1.5B
9:00	EUR	Italian CPI (Including Tobacco) MoM (APR)		0.5%	Italian inflation released at same time as EU-zone data. Peripheral country data will not have that large of impact
9:00	EUR	Italian CPI (Including Tobacco) YoY (APR)		2.6%
9:00	EUR	Italian CPI (EU Harmonized) MoM (APR)		1.1%
9:00	EUR	Italian CPI ( EU Harmonized ) YoY (APR)		3.0%
12:30	CAD	Manufacturing Sales MoM (MAR)		-1.5%	Manufacturing may slow as exports fall
12:30	USD	Empire Manufacturing (MAY)	19.75	21.7	May be lowered by falling demand
13:00	USD	Total Net Tic Flows (MAR)		$97.7B	Treasury International Capital may fall as private transactions slow
13:00	USD	Long Term Total Net Tic Flows (MAR)		$26.9B
14:00	USD	NAHB Housing Market Index (MAY)	17	16	House prices gain may be good indicator going into summer months

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	1.4102	1.6182	80.80	0.8925	0.9688	1.0576	0.7871	113.95	130.75
Support 1	1.4000	1.6200	80.00	0.8600	0.9500	1.0400	0.7825	115.00	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	11.7370	1.5965	7.0106	7.7722	1.2448		Spot	6.3892	5.2871	5.5762
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	1.4443	1.6373	81.49	0.9039	0.9818	1.0801	0.8021	116.36	132.78
Resist 1	1.4272	1.6278	81.15	0.8982	0.9753	1.0688	0.7946	115.15	131.76
Pivot	1.4170	1.6212	80.74	0.8890	0.9679	1.0605	0.7891	114.34	131.02
Support 1	1.3999	1.6117	80.40	0.8833	0.9614	1.0492	0.7816	113.13	130.01
Support 2	1.3897	1.6051	79.99	0.8741	0.9540	1.0409	0.7761	112.32	129.27

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	1.4293	1.6347	81.73	0.9040	0.9787	1.0724	0.7981	115.84	132.81
Resist. 2	1.4245	1.6306	81.50	0.9011	0.9762	1.0687	0.7954	115.37	132.30
Resist. 1	1.4198	1.6265	81.27	0.8983	0.9737	1.0650	0.7926	114.90	131.78
Spot	1.4102	1.6182	80.80	0.8925	0.9688	1.0576	0.7871	113.95	130.75
Support 1	1.4006	1.6099	80.33	0.8867	0.9639	1.0502	0.7816	113.00	129.71
Support 2	1.3959	1.6058	80.10	0.8839	0.9614	1.0465	0.7788	112.53	129.20
Support 3	1.3911	1.6017	79.87	0.8810	0.9589	1.0428	0.7761	112.06	128.68

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

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