The greenback was stronger at the close of North American trade on Thursday with the Dow Jones FXCM Dollar Index (Ticker: US Dollar) advancing 0.65% on the session. The gains come on the back of yet another massive sell-off in global equity markets that saw the Dow, the S&P, and the NASDAQ plunge 3.68%, 4.46%, and 5.22% respectively. Dismal data prints Thursday morning supported the notion of further slowing in the world’s largest economy with existing home sales contracting 3.5% m/m, missing calls for a gain of 2.7% m/m. Adding to the negative sentiment was weaker than expected read on the Philadelphia Fed survey which printed at -30.7, grossly missing calls for a read of +2.0. The print marks the worst read since March of 2009 and was accompanied by a slightly weaker weekly jobless claims report.
The data were preceded by consumer price index figures that showed the pace of inflation picking up in July, printing at 0.5% m/m. Consensus estimates were calling for a read of just 0.2% m/m, after a contraction of 0.2% in June. With the Fed’s pledge to hold rates at zero percent through mid-2013, Chairman Ben Bernanke is likely to see increased pressure from various voting members who have already expressed their disapproval of the central bank’s prolonged easing policy. And as sluggish growth in the employment sector persists, the domestic economy now risks a period of stagflation, an unwelcomed relic of the past.
Thursday's data prints proved to be a recipe for disaster as a broad based risk sell-off slammed global markets. The greenback should remain well supported here with the index recouping all the losses seen over the past two days as equity markets drifted. Having said that, it’s worth noting that the 9460 level has continued to be an area of congestion for the dollar suggesting a short-term pull back may be in the cards.
As cited in Wednesday's USD Trading Today report, the index held support at the 61.8% Fibonacci extension taken from the July 12 and Aug. 8 crests just above 9400 before breeching upper-bound trendline support of the descending channel dating back to Aug. 11. However, the greenback lost steam just ahead of the 38.2% extension at 9513 where interim resistance now stands. A topside break eyes targets at 9550 with subsequent ceiling eyed at the 23.6% retracement at 9580 and 9600. Interim support rests at the 50% extension at 9460 backed by 9400 and 9370.
The dollar advanced against all the component currencies save the yen which closed the day with a marginal gain of just 0.02%. Risk aversion flows have continued to support the yen as a massive sell-off in global equities saw traders seeking refuge in lower yielding ‘haven’ currencies. However, with the yen now approaching pre-intervention levels, demand may start to wane on concerns that Japanese policymakers may once again move to stem the currency’s rise as it will continue to weigh on the fragile economy. The performance chart is highlighted by a 1.51% advance against the aussie which came under pressure as traders scrambled to jettison higher yielding risk assets. The Australian dollar saw the highest degree of volatility, moving a full 108.35% of its daily average true range. As we noted in Thursday's Winners/Losers report, the aussie seems to have completed a 3 wave corrective pattern, suggesting a continuation of the encompassing downtrend it likely. The sterling remains surprisingly resilient sliding just 0.16% as haven flows are diverted from the swissie which remained in within its recent range on concerns the SNB will attempt further measures at curbing demand for the franc.
There is no data on Friday's economic docket and markets are likely to remain in a lull into the close of trade this week as investor take to the sidelines after Thursday's substantial sell-off. Market sentiment will remain on the defensive with investors closely eying developments out of Europe in the absence of U.S. data.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: firstname.lastname@example.org.