Dollar Retreats to Critical Support, Awaiting Fundamental Ignition

Dollar Retreats to Critical Support, Awaiting Fundamental Ignition
Euro Finds Limited Reassurance from Portugal Resolution
Japanese Yen Slides, Nikkei 225 Climbs after Election Results
British Pound Wins GBPUSD Breakout, Crosses May Wait for GDP
Australian Dollar Traders Will Renew Rate Speculation on 2Q CPI Release
New Zealand Dollar: NZDJPY Breakout with Trade Data?
Gold: How Far Does the $1,300 Breakout Project?

Dollar Retreats to Critical Support, Awaiting Fundamental Ignition
The US dollar took a hit to open this week with the benchmark currency flashing red against all its major counterparts and suffering tentative technical breaks with a few of its pairings (EURUSD and GBPUSD). There was some measure of fundamental support for this unfavorable move, but the greenback’s intraday dive didn’t line up to the calendar items. The Chicago Fed’s National Activity Index for June bolstered concerns about growth with a -0.13 reading, while existing home sales unexpectedly dropped 1.2 percent to a 5.08 million pace. Where this data truly carries its weight is the degree that it lowers Fed officials’ expectations for economic activity and thereby delays the call for the dreaded / anticipated Taper. While notable indicators, this data has likely done little to tip the scales in the timing of the Fed’s moderation of its $85 billion-per-month stimulus program. The economic docket is likely to carry limited influence over shaping the consensus for policy timing this week – especially with the combination of the 2Q US GDP, July NFPs and a FOMC rate decision scheduled for next week. In the meantime, an updated Reuter’s poll showed 33 of 56 economists sampled expect the Taper to begin in September.

Euro Finds Limited Reassurance from Portugal Resolution
A meaningful fundamental threat was seemingly removed from the path of the euro: the avoidance of an early election in Portugal. Had that risk been realized, one of the Eurozone’s ‘success stories’ on the austerity diet would have been more likely to fall apart and thereby undermine the entire ploy by the Troika to tighten its way to growth and market confidence. Yet, investors likely didn’t entertain a high probability for the negative outcome in the first place. Furthermore, the situation the country now faces is likely to be just as fraught with troubles and uncertainties. Reverting back to the Prime Minister Coelho’s original plan after the Socialist party rejected a common goal due to austerity measures, we now find former Foreign Minister Portas in position to negotiate with the Troika on the country’s rescue program. It is expected that he will call for more accommodation. Coming up, we have the Bank of Portugal Bank Lending Survey and Eurozone investor confidence survey.

Japanese Yen Slides, Nikkei 225 Climbs after Election Results
The other top event risk over the weekend was the Upper House Parliamentary elections in Japan. The ruling coalition formed between Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) and New Komeito secured 135 of the 242 seat Upper House and now controls both houses of Parliament. With this win, it is expected that Abe will forge ahead with implementing the ‘Third Arrow’ of his plan to revive the economy – support through financial stimulus and reform. The implications for equities was clear as the Nikkei 225 advanced 0.5 percent – a move that recovers only a third of Friday’s pre-election loss. For the yen, it is supports the effort to devalue through stimulus; but the additional leverage is likely limited – hence the yen’s universal advance Monday. Coming up, trade figures will establish whether a softer currency is helping.

British Pound Wins GBPUSD Breakout, Crosses May Wait for GDPThe sterling put in for a notable advance against key counterparts like the US dollar, Euro and Swiss franc through the opening trading session of the week. Yet, the technical appeal of GBPUSD’s break through 1.5300 is diminished when we recognize the tame fundamental support for the meaningful move. From the headlines, there was some bullish fodder from Prime Minister David Cameron’s remarks in an interview that he would look to reduce taxes as the economic recovery took a foothold. That is encouraging, but predicated on a very substantial uncertainty – sustainable growth. And, on that point, we actually have a definitive update on the UK economy due later this week. The 2Q GDP reading for the country will have serious market-moving heft. And, as is the case with such data, speculation heading into its release will likely curb heavy speculative positioning before its release.

Australian Dollar Traders Will Renew Rate Speculation on 2Q CPI Release
We’ve seen a slow and hesitant rebound made by the Australian dollar over the past week thanks to a combination of relentless equity index appreciation and a slow shift in the outlook for Reserve Bank of Australia (RBA) monetary policy. There isn’t a clear catalyst which we can expect to shift risk trends this week, but there is upcoming event risk that can alter the view on rate expectations. Considering the central bank has held to an irregular pace of rate cuts since late 2011, the more remarkable speculative outcome for data and commentary moving forward would be to see anything that supports expectations that the dovish regime is actually coming to an end. As it happens, tomorrow offers the 2Q CPI figures for release. The 2.5 percent headline, year-over-year estimate would be in-line with the previous reading. If it heats up, though, it can accelerate changing sentiments. Currently, the market sees a 68 percent chance of a rate cut next month.

New Zealand Dollar: NZDJPY Breakout with Trade Data?
Though trade is a very important aspect of the New Zealand economy, we should next expect the updates on its health to single-handedly develop a trend for the currency. There are deeper currents that quickly overwhelm the short-term updates from calendar events of this type – including the general appetite for carry as well as rate expectations for the Reserve Bank of New Zealand (RBNZ). That said, pairs that show technical tension such as NZDJPY – in other words, those prone to breakouts – can tap into a meaningful indicator like the June trade report for an initial push. Yet, with the actual RBNZ rate decision itself due the next day, don’t expect follow through on such ‘routine’ data.

Gold: How Far Does the $1,300 Breakout Project?
Gold finally found the fundamental push it needed to resolve the pressure cooker-like congestion between $1,300 and $1,265 that had developed the past week. Monday’s 3.1 percent rally was the commodity’s strongest drive in 13-months. That comparable move back in June of last year stalled immediately after the incredible surge however. That is the risk that exists for gold bulls. As a fundamental catalyst, the dollar’s slip was meaningful enough to force the bullish breakout above the round number. Yet, the appetite for an alternative to the renowned safe haven currency hasn’t suddenly surged as of late. Without a significant upgrade in the delay for a Fed Taper, the anti-dollar appeal is likely to generate limited appeal. Alternatively, a conventional, speculative rebound after the metal shed a third of its value in 9 months is a very real possibility. The CBOE’s Gold Volatility Index has eased back to 22 percent, ETF (paper) buying ticked higher with the recent punch and COT figures showed the first increase in net long futures positioning in six weeks. This still provides limited foundation for a lasting climb.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

6:45

EUR

French Business Survey Overall Demand (JUL)

-22

Business confidence has remained in a tight range over the past few months. Any missed print in conjunction with other poor indicators puts further pressure on an already strained Euro-Zone.

6:45

EUR

French Own-Company Production Outlook (JUL)

6:45

EUR

French Production Outlook Indicator (JUL)

-42

6:45

EUR

French Business Confidence Indicator (JUL)