Dollar Traders Balance Liquidity Concerns against Fed Rate Decision

The greenback ended this past week on a notably-weak footing. Though it would be a tidy explanation to simply assign responsibility for the biggest drop in two weeks on the weaker-than-expected reading from the University of Michigan's consumer sentiment survey, that would ignore the true fundamental currents behind the market.

• Dollar Traders Balance Liquidity Concerns against Fed Rate Decision
• Euro Struggle for Relief with Greece, Moody's Raises a Red Flag on Italy
• British Pound at the Mercy of Stronger Cross-Pair Trends
• Japanese Yen: Performance Based on Direction and Source of Risk Trends
• New Zealand Dollar Faces another Update on Earthquake Influence
• Canadian Dollar Holding Strong as Rate Expectations, US Oil Drop
• Gold Advances after IMF Warns of Greek Contagion Risk, Lowers US Growth Outlook

Dollar Traders Balance Liquidity Concerns against Fed Rate Decision

The greenback ended this past week on a notably-weak footing. Though it would be a tidy explanation to simply assign responsibility for the biggest drop in two weeks on the weaker-than-expected reading from the University of Michigan's consumer sentiment survey, that would ignore the true fundamental currents behind the market. The true culprit behind the stumble is the same that sparked the rally earlier in the week: the global implications of Greece's financial ‘situation'. When news of the EU member's political troubles hit the wires Wednesdays, the financial ripples spread quickly as investors scrambled to hedge their exposure to risky European exposure and subsequently taxed the market's liquidity for short-term funding. This panicked demand for access to capital is the same leverage that pushed the dollar to its heights during the 2008, global financial crisis. Yet, when the need for safety flags, so too does the appetite for the greenback. And, despite the pullback after mid-day through the New York session, equities put in for a positive close for the week; while the euro climbed against most of its counterparts. Through this rebalancing effort, the Dow Jones FXCM Dollar Index found dropped 0.7 percent to close at 9,598.

Heading into the new trading week, the same themes will likely remain the dollar's primary source of direction and momentum. For guidance, the traditional S&P 500 as our benchmark risk appetite will still be the favored barometer. However, to derive a true sense of strength for the dollar; we'll need to establish the source and quality of sentiment. Improvements in risk appetite will generally have the same result for the currency – losses. It is the potential in failing sentiment that requires careful contemplation. Since liquidity is the dollar's true allure; we need to keep an eye on the very stability of the financial and funding markets. Measures of volatility (which work well to gauge panic as well as the rates for insurance) and benchmarks for overnight funding are the best indications of dollar strength.

This underlying, fundamental concern aside the economic docket carries a significant round of growth-related indicators (durable goods orders, new and existing home sales); the only event to carry a substantial weigh for the FX market is the FOMC rate decision. Last month, the Fed held rates unchanged (as was fully expected) and Chairman Bernanke delivered his first press conference. These meetings were intended to be quarterly updates; so we shouldn't expect anything more than the statement. On the other hand, this is the last meeting before QE2 is scheduled to expire. Traders, investors, economists and policymakers will all watching closely to see if there is any mention of the central bank's plans to increase or work down its extraordinary stimulus going forward. Very early plans for a withdrawal could very well be discussed.

Related:Discuss the Dollar in the DailyFX Forum, Weekend Video: EURUSD Tumble Depends on Greek Agreement, Liquidity Trends

Euro Struggle for Relief with Greece, Moody's Raises a Red Flag on Italy

We took a few sharp turns in our fundamental reading for the euro through this past Friday's session. Through the morning, the currency was on the rise as news spread that headway was made on EU leaders' discussion over the Greece situation. German Chancellor Angela Merkel suggested her country was willing to ease off on demands for the troubled nation to roll its debt forward for another seven years before they would entertain the thought of additional support. This seems to open the way for an agreement at Sunday's meeting of officials to release the next tranche of support for the troubled member. That said, this is in itself a temporary fix. Agreeing to release the next round of support from the first package does not guarantee officials will simply pass the second bailout package (and now it seems Greece may look to play hardball). In the meantime, Moody's put Italy on credit review as the fallout from the Mediterranean nation spreads.

British Pound at the Mercy of Stronger Cross-Pair Trends

Six months ago, the pound was following its own bearings with interest rate speculators watching inflation and long-term investors tracking the progress of austerity measures. Today, the sterling is finding more of its direction from its counterparts than its own fundamental backdrop. With the rate outlook non-existent, we will watch public sector borrowing figures as they reflect the balance of austerity and growth.

Japanese Yen: Performance Based on Direction and Source of Risk Trends

Having broken down the dollar's particular brand of safe haven appeal, we are better able to understand the yen's strengths and weakness. This currency will certainly follow strong risk trends against high-yielding currencies; but nuance is more important against fellow safe havens. A straightforward drop in risk aversion (equities entering an orderly downtrend) would be the best outcome for a yen rally.

New Zealand Dollar Faces another Update on Earthquake Influence

We have seen the economic impact of the February earthquake and heard sobering assessments from both the nation's Central Bank Governor and Prime Minister; but the market continues to bid the currency higher on rate expectations. With the kiwi easing back these past few weeks, perhaps traders will take the first quarter manufacturing and current account figures a little more seriously.

Canadian Dollar Holding Strong as Rate Expectations, US Oil Drop

The boost in risk appetite through the end of the week helped the Australian and New Zealand dollar mount a rally; but the Canadian dollar found itself leaden against the greenback. The lack of yield was certainly a factor; but likely so too was the critical drop in oil. The commodity's reversal is gaining momentum as it has now slipped to four month lows below the closely watched $95 level.

Gold Advances after IMF Warns of Greek Contagion Risk, Lowers US Growth Outlook

In a normal shift in risk capital, the market will likely keep money market and FX capital the same asset class. However, we saw that the move towards safety actually leveraged gold as well. This advance was no doubt helped by skepticism surrounding the Greece bailout compounded by Italy's rating warning. Furthermore, the downgraded growth outlook from the IMF to 2.5 percent for this year certainly wouldn't help.

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ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
22:30	NZD	Performance Services Index (JUN)		52.6	Services index could lead NZ economy
22:45	NZD	Manufacturing Activity (1Q)		3.1%	1Q activity expected to be damaged by Christchurch earthquake
22:45	NZD	Manufacturing Activity Volume SA (1Q)		3.3%
23:01	GBP	Rightmove House Prices (MoM) (JUN)		1.3%	June house prices will be major indicator of how British real estate is performing
23:01	GBP	Rightmove House Prices (YoY) (JUN)		0.7%
23:50	JPY	Merchandise Trade Balance Total (Yen) (MAY)	-¥711.1B	-¥464.8B	May exports expected to continue falling as rebuilding of major industries slow on supply issues
23:50	JPY	Adjusted Merchandise Trade Balance (Yen) (MAY)	-¥520.0B	-¥496.4B
23:50	JPY	Merchandise Trade Exports (YoY) (MAY)	-8.1	-12.4
23:50	JPY	Merchandise Trade Imports (YoY) (MAY)	11.6	8.9

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	1.4301	1.6180	80.02	0.8489	0.9807	1.0614	0.8119	114.44	129.47
Support 1	1.4000	1.6050	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	11.9047	1.5946	6.7700	7.7902	1.2323		Spot	6.4146	5.2161	5.5217
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	1.4467	1.6259	80.91	0.8548	0.9910	1.0714	0.8214	115.41	130.74
Resist 1	1.4384	1.6219	80.46	0.8518	0.9859	1.0664	0.8167	114.92	130.10
Pivot	1.4256	1.6157	80.24	0.8481	0.9817	1.0585	0.8090	114.33	129.73
Support 1	1.4173	1.6117	79.79	0.8451	0.9766	1.0535	0.8043	113.84	129.10
Support 2	1.4045	1.6055	79.57	0.8414	0.9724	1.0456	0.7966	113.25	128.73

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	1.4495	1.6341	80.88	0.8596	0.9901	1.0757	0.8232	116.19	131.17
Resist. 2	1.4447	1.6300	80.67	0.8569	0.9877	1.0721	0.8204	115.75	130.75
Resist. 1	1.4398	1.6260	80.45	0.8542	0.9854	1.0685	0.8175	115.31	130.32
Spot	1.4301	1.6180	80.02	0.8489	0.9807	1.0614	0.8119	114.44	129.47
Support 1	1.4204	1.6100	79.59	0.8436	0.9760	1.0543	0.8063	113.57	128.62
Support 2	1.4155	1.6060	79.37	0.8409	0.9737	1.0507	0.8034	113.13	128.20
Support 3	1.4107	1.6019	79.16	0.8382	0.9713	1.0471	0.8006	112.69	127.77

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

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