FOREX: Dollar Stages Biggest Rally in Nearly Three Weeks as S&P 500, Euro Falter

It was a remarkable ending to the week for the greenback. Friday's 0.8 percent rally for the Dow Jones FXCM Dollar Index was the best run in nearly three weeks while the overall performance for the week was the strongest in a month.

• Dollar Stages Biggest Rally in Nearly Three Weeks as S&P 500, Euro Falter
• Euro Tumble Intensifies as Officials Argue Over Greek Bailout
• British Pound Stumbles as Factory Activity Takes a Hit from Japan, Holidays
• Canadian Dollar Doesn't Hold on to Post-Jobs Data Rally as Risk Tumbles
• Swiss Franc will Have its Risk Appeal Tested by SNB Decision Next Week
• Japanese Yen: Intervention and BoJ Stimulus Notable Threats
• Gold Wavers from its Bull Trend as the Dollar Firms

Dollar Stages Biggest Rally in Nearly Three Weeks as S&P 500, Euro Falter

It was a remarkable ending to the week for the greenback. Friday's 0.8 percent rally for the Dow Jones FXCM Dollar Index was the best run in nearly three weeks while the overall performance for the week was the strongest in a month. This kind of momentum would lead anyone to believe that the currency has positioned itself for a tremendous bull run through the rest of June. It is easy to jump on this bandwagon considering how far the greenback has been pushed over the past months and the buildup of fundamental considerations for its recovery. However, we should truly consider the thrust behind this move before throwing in our full support. Has risk appetite truly collapsed on itself, are US rates finally past the point of recovery or is the situation in the Euro-area so dire that capital is fleeing to its most liquid counterpart? If one of these three catalysts haven't triggered; bulls may be severely disappointed next week.

We can perform a quick fundamental review to see if the dollar's primary sources of strength have been initiated. Risk appetite is the most sensitive catalyst; and it would seem an obvious lever for the greenback as the S&P 500 actually closed out the lowest weekly position for the benchmark index this year. That said, momentum is still lacking the levels of volume we would expect in a dramatic move; and more importantly, Asian and European markets have not followed their US counterpart to new lows. Investor sentiment (especially in the FX market) is a global consideration; so this inconsistency significantly weighs on confidence. As for a recovery in rates in anticipation of the QE2's end, we note that the three-month US Libor hit a fresh record low and the two-year Treasury yield fell on the day. That leaves us with the potential cross-flows from euro selling. This is a big question market for fundamental traders; because while the euro was sharply lower, the troubles it is facing with Greece are not measurably worse than two weeks ago when the market was little concerned.

Heading into the new trading week, the situation with the Euro-area's financial stability will most likely carry the greatest potential for the dollar. Should confidence in the currency touted as the best alternative to the dollar as a reserve currency is facing a member default; it could certainly flip the market's expectations – at least through the short-term. What's more, a significant deterioration in the Euro Zone's financial and credit conditions could also spark a global slump in risk appetite (another boon for the greenback). As for rates, we will have to keep our eyes open; but the Fed confirmed its intentions to perform its last two Permanent Open Market Operations (POMO) through the end of the month so a shift here will depend on speculation. As for the docket, the CPI figures stand as top billing as a 3.4 percent headline figure is expected.

Related:Discuss the Dollar in the DailyFX Forum, John's Picks: We Took Profit on EURUSD and EURCAD but We Could Jump Right Back In

Euro Tumble Intensifies as Officials Argue Over Greek Bailout

We have become quite acclimated to officials' efforts to buy time on the Euro-area's financial struggle without solving the underlying problem. It is this familiarity that has led the market to treat the progression of a contentious Portuguese bailout (still not finalized), Ireland ire for better rates on its rescue loans (still not finalized) and the dawning reality that Greece will not be able to make it through 2012 without a dramatic save (certainly not finalized) so cavalierly. Yet, as some point, the kick-the-can-down-the-road strategy will no longer work and investors will eventually have to take a loss. When the government can no longer keep the burden of reality off investors' shoulders, market confidence will come crashing down. With Germany resolute in its demands for private investors to share losses (or roll debt forward seven years) and Trichet stated the ECB has no intention of rolling out its own Greek holdings; we are quickly reaching a cross roads. Though this isn't exactly new…

British Pound Stumbles as Factory Activity Takes a Hit from Japan, Holidays

There was a ready explanation for the sharp drop in April factory activity for the UK: the holiday for the royal wedding and the disruption in Japanese supply chains naturally weighed output. Nevertheless, the sterling still suffered through Friday. With the broader economy showing a slowdown in the face of austerity and Europe showing financing issues; investors weren't easily reassured by preconceived explanations.

Canadian Dollar Doesn't Hold on to Post-Jobs Data Rally as Risk Tumbles

While the economic data up for grabs Friday was positive, the overall market conditions for the Canadian dollar was certainly negative. The unexpected 28-month low for the unemployment rate (7.4 percent) was remarkable; but the nearly inline 22,300 net increase in payrolls wasn't. Instead, a drop in underlying sentiment trends and the biggest collapse in oil prices in two months hit a particular note with loonie traders.

Swiss Franc will Have its Risk Appeal Tested by SNB Decision Next Week

The franc is a remarkable currency. It has shown remarkable strength through markets that are both panicked and focused on yield. Where the safe haven appeal can be explained (the banking economy and harbor for Euro-area capital is well known); its performance through risk appetite is more difficult to reconcile. We will be reminded of just where the Swissie sits in the spectrum this week when the SNB holds rates.

Japanese Yen: Intervention and BoJ Stimulus Notable Threats

There has been no shortage of discussion of yen intervention this past week as USDJPY has dropped back to 80. This is not an unwarranted consideration given the initial effort to drive the pair from such depths after the Japanese earthquake. Yet, we don't have that kind of crisis now. The exchange rate is less volatile. More likely, it will be the exceptionally proliferate stimulus that will eventually drive the currency to reversal.

Gold Wavers from its Bull Trend as the Dollar Firms

Trading activity picked up for gold through the final trading session of this past week; but it wasn't enough to convince us of a new trend. Volatility and volume are still exceptionally low as the now familiar bull trend has shown little trouble with consistency. Wobbles won't really turn to serious reversals until the dollar is ready to draw capital back from the non-interest-bearing metal through higher rates of its own.

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ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
Jun 10-15	CNY	Actual FDI (YoY) (MAY)		15.2%	Foreign investment may see pick-up as global economy recovers
June 9-14	NZD	REINZ Housing Price Index (MAY)		3245.4	Index may indicate pace of housing market, and if NZ market is following Australian sector
	NZD	REINZ Housing Price Index MoM% (MAY)		1.1%
	NZD	REINZ House Sales (YoY) (MAY)		-4.2%
June 11-15	CNY	New Yuan Loans (MAY)	650.0B	739.6B	Loans drop, although M2 M3 supply expected to continue growth after further PBoC tightening
	CNY	Money Supply - M0 (YoY) (MAY)		14.7%
	CNY	Money Supply - M1 (YoY) (MAY)	13.7%	12.9%
	CNY	Money Supply - M2 (YoY) (MAY)	15.5%	15.3%
23:50 (Sun)	JPY	Machine Orders (MoM) (APR)	2.3%	2.9%	Latest records suggests still slowing Japanese economy in midst of recovery
23:50 (Sun)	JPY	Machine Orders (YoY) (APR)	5.0%	6.8%
8:00	EUR	Italian Industrial Production s.a. (MoM) (APR)	0.1%	0.4%	Heavy industries still see problems as demand falls, strong euro saps competitiveness
8:00	EUR	Italian Industrial Production w.d.a. (YoY) (APR)		3.1%
8:00	EUR	Italian Industrial Production n.s.a. (YoY) (APR)		0.8%
22:45	NZD	Food Prices (MoM) (MAY)		0.1%	Although indicator of inflation, RBNZ focuses mainly on core inflation
23:01	GBP	RICS House Price Balance (MAY)		-21.0%	BoE uses this and 2 other measures

GMT	Currency	Upcoming Events & Speeches
(Sun)	JPY	BOJ to Hold Regular Policy Meeting (APR)
13:30	USD	Fed's Lacker speaks on manufacturing in Roanoke

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	122.00	146.05
Resist 1	1.5000	1.6600	86.00	0.8900	1.0000	1.1000	0.8215	118.00	140.00
Spot	1.4347	1.6239	80.31	0.8426	0.9772	1.0564	0.8215	115.22	130.41
Support 1	1.4000	1.6160	80.00	0.8300	0.9500	1.0400	0.7745	113.80	125.00
Support 2	1.3700	1.5750	75.00	0.8250	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	11.8809	1.5785	6.7878	7.7849	1.2362		Spot	6.3361	5.1992	5.4884
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	1.4635	1.6446	80.75	0.8453	0.9845	1.0708	0.8304	117.59	132.52
Resist 1	1.4491	1.6343	80.53	0.8440	0.9809	1.0636	0.8259	116.41	131.46
Pivot	1.4407	1.6280	80.25	0.8418	0.9760	1.0581	0.8237	115.68	130.64
Support 1	1.4263	1.6177	80.03	0.8405	0.9724	1.0509	0.8192	114.50	129.59
Support 2	1.4179	1.6114	79.75	0.8383	0.9675	1.0454	0.8170	113.77	128.76

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	1.4529	1.6395	81.16	0.8531	0.9862	1.0703	0.8325	116.86	132.02
Resist. 2	1.4484	1.6356	80.95	0.8504	0.9840	1.0668	0.8298	116.45	131.61
Resist. 1	1.4438	1.6317	80.73	0.8478	0.9817	1.0634	0.8270	116.04	131.21
Spot	1.4347	1.6239	80.31	0.8426	0.9772	1.0564	0.8215	115.22	130.41
Support 1	1.4256	1.6161	79.89	0.8374	0.9727	1.0494	0.8160	114.40	129.61
Support 2	1.4210	1.6122	79.67	0.8348	0.9704	1.0460	0.8132	113.99	129.21
Support 3	1.4165	1.6083	79.46	0.8321	0.9682	1.0425	0.8105	113.58	128.81

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

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