FOREX: Dollar at High Risk of Reversal Unless Aggressive Euro Selling or Risk Aversion Kick In

• Dollar at High Risk of Reversal Unless Aggressive Euro Selling or Risk Aversion Kick In
• British Pound Traders May Make Up for the Lack of BoE Reaction with the Quarterly Report
• Euro Once Again Pacified by Empty Words of Stability from Officials, Poor Greek Auction
• New Zealand Dollar Under Greater Pressure after RBNZ's Bollard Agrees with IMF
• Canadian Dollar Borrows Inspiration from the Rebound in Oil, Looks Ahead to Trade
• Australian Dollar Doesn't Fear the Withdrawal of Stimulus Like the Pound Does
• Gold Advances at a More Controlled Pace as Investors Await Dollar's Fate

Dollar at High Risk of Reversal Unless Aggressive Euro Selling or Risk Aversion Kick In

The impressive climb the dollar was able to manage last week has fully stalled. What we need to determine now is whether this lack of momentum is merely a period of consolidation or the beginning of a revived selling effort. Looking back to the genesis of this counter-trend move (there is no doubting the bearish intentions of the market since the year began), we were coming up short on the primary fundamental drivers. Though there are literally millions of potential catalysts for the dollar, a meaningful trend will really only come through specific developments. It so happened that the advance began with a tame retracement in investor sentiment that saw the S&P 500 pull back from multi-year highs. Playing to the safe haven appeal of the greenback is one of the few sure-fire ways to encourage the currency higher. However, by Thursday, the burden of momentum shifted over to the aggressive unwinding of the euro; which benefits the dollar by virtue of EURUSD representing the most liquid currency pair if the FX market. Given the conviction in the euro selloff; it was easy to overlook the fact that sentiment trends were staring to rebound. Therefore, when the run against the greenback's primary counterpart tapered, we would be left to the same lackluster fundamentals.

In addition to a notable euro bounce this past trading session, the dollar would also confront the S&P 500's biggest rally in two weeks. When yield appetite supersedes doubt over uncertain risks, the record low yields on the dollar and ample speculative liquidity pumped in through stimulus will quickly put the greenback under pressure. Yet, we need to keep a close eye on conviction behind the build in risk appetite and the dollar's position as a funding currency. Optimism itself, is proving harder and harder to generate and sustain. With this week's recovery, we should note that the benchmark equity index's climb sees volume is still running at exceptionally low levels following the second lowest level of turnover noted this Monday. As for the dollar's role as a safe haven, the role is still well-engrained; but we are quickly coming to the June expiration of the $600 billion QE2 program. Richmond Fed President Jeffrey Lacker made note of this fact Tuesday when he commented that stimulus should be withdrawn after the facility matured. And, offering a more definitive hawkish tone, he went on to say the central bank risks “losing ground on inflation” and it was better to act “preemptively” on price pressures. We'll look to see whether Kocherlakota can keep up the hawkish speculation in the upcoming US session; but don't expect it to offer the dollar much reprieve.

Related:Discuss the Dollar in the DailyFX Forum, John's Picks: EURUSD and EURCAD Ready for Reversal, GBPCAD Event Specific

British Pound Traders May Make Up for the Lack of BoE Reaction with the Quarterly Report

The British pound put in for a mixed performance Tuesday – notable rising against safe havens (the dollar, franc and yen) and slipping against the higher-yielding counterparts (euro, Aussie, Kiwi and Canadian dollars). The implications should be clear – the sterling was essentially stuck in neutral. The lack of conviction is somewhat surprising given the encouraging event risk that preceded the London session's official open. The BRC's retail sales report for April reported the biggest jump in spending in five years while the RICS House Price Balance survey for the same month hit its highest reading since July. Historically, the indicators lack for influence; but when the market is seeking out guidance on interest rate expectations, data like this is more valuable. Speaking of interest rates, the upcoming London session brings the pound's heaviest event risk for the week. The BoE Quarterly Inflation report is tantamount to the ECB and Fed policy statements and press conferences these past two weeks. When the UK's Monetary Policy Committee doesn't change rates or its purchasing program, no update from policy officials is issued. The upcoming report will offer forecasts for growth and inflation while further offering a bearing on their lean towards future policy. Expect volatility.

Euro Once Again Pacified by Empty Words of Stability from Officials, Poor Greek Auction

Once again, the market is placated by empty promises from EU officials. The euro put in for a substantial advance against most of its counterparts Tuesday after a Greek six-month debt auction found bids to cover the 1.625 billion euro sale. Yet, the 4.88 percent yield the market demanded compares to the Netherland's 3.405 percent yield on a 10 year auction from Netherlands on the same day. There is no confidence here, just pure want for returns. And, if policy officials try to push back a decision on Greece's “adjustments” until June, why not take advantage?

New Zealand Dollar Under Greater Pressure after RBNZ's Bollard Agrees with IMF

Shortly after the IMF issued its assessment that the New Zealand dollar is as much as 20 percent oversold, industrious fundamental traders were looking to see if the short-term drawdown on the currency would be supplemented by a drop in rate expectations. RBNZ Governor Bollard naturally didn't offer an contradiction to the call; but then again, his effort to talk the currency down in the past failed so why would this succeed?

Canadian Dollar Borrows Inspiration from the Rebound in Oil, Looks Ahead to Trade

Oil is slowly recovering lost ground as the US dollar finds its recovery blocked by return-hungry traders. The demand for commodities and preceding pain for the greenback is a double benefit for USDCAD. Yet, the rebound in crude is still tame. Perhaps the upcoming release of the March trade figures from Canada will help encourage a little more gusto from price action. A neutral reading leaves us wide open to surprise.

Australian Dollar Doesn't Fear the Withdrawal of Stimulus Like the Pound Does

After decades of a growth-supportive fiscal policy, Australia seems to finally be turning a corner. The Federal budget is expected to generate A$22.2 billion in savings over the coming four years with a target to return to a A$3.5 billion surplus by 2013. Such an effort to curb activity certainly hurts growth; but it doesn't have to hurt a currency – like it does the pound. This effort is unlikely to have a near-term impact on rates.

Gold Advances at a More Controlled Pace as Investors Await Dollar's Fate

Gold is advancing for the fourth consecutive session; but we are seeing a notable deceleration in momentum in the rebound. This isn't unexpected as extreme positioning (like the selloff of last week) naturally leads to an equivalent correction. Beyond the bounce, fundamentals need to kick in. For that, we await guidance on the troubles for the euro and dollar. Will fiscal disorder lead to the abandonment of fiat currency?

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

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