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•US Dollar Gains on Flight-to-Quality, Nearing Breaking Point Ahead of US Housing Report
•British Pound Slumps vs. Low Yielders as UK Home Prices Fall for First Time Since January
•Euro Down Despite Improving Business Sentiment - Watch Immediate Support at 1.3815/30
•Commodity Dollars Plunge as FX Carry Trade Demand Wanes
•Japanese Yen Dominates as DJIA Falls 2.4%, S&P 500 Plummets 3.1%
The US dollar was the second-strongest of the majors as risk aversion drove carry trades lower. That said, the greenback generally remains in consolidation mode versus most of the majors. Looking to the DXY index, we see that the greenback is consolidating within a wedge formation with support looming below at a rising trendline near 80.24 connecting the June 3, June 11, and June 19 lows. With resistance looming just above at 80.85/90, a breakout seems imminent.
On Tuesday, the National Association of Realtors (NAR) is anticipated to report that existing home sales rose for the second straight month at a rate of 2.6 percent in May to an annual pace of 4.80 million from 4.68 million. While not always a reliable leading indicator, there are encouraging signs that existing home sales could improve in line with expectations, as the Commerce Department reported on June 16 that housing starts jumped for the first time in three months by 17.2 percent in May to an annual rate of 532K from a record low of 454K. Likewise, building permits rose by 4.0 percent during the month to an annual rate of 518K from a record low of 498K.
Related Article: US Dollar Weekly Trading Forecast
British Pound Slumps vs. Low Yielders as UK Home Prices Fall for First Time Since January
The British pound ended Monday mostly lower, losing against the US dollar, Japanese yen, euro, and Swiss franc but gaining versus the commodity dollars. Looking to relevant data, Rightmove Plc said that their index of average UK home prices fell 0.4 percent in May to 226,436 pounds, marking the first contraction since January, and suggesting that the UK's housing market isn't in the clear yet as recession lingers and credit remains tight. There's little in the way of event risk on Tuesday, making it all the more important to keep technical considerations in mind, as well as US dollar trends. Indeed, GBP/USD has spent a good amount of time consolidating, suggesting that a breakout for the pairs may be in the cards in the near-term. For support, traders should keep an eye on a rising trendline connecting the 5/18, 6/8, and 6/18 lows near 1.6300 and resistance from a falling trendline connecting the 6/3, 6/11, and the 6/19 highs near 1.6545/50.
Euro Down Despite Improving Business Sentiment - Watch Immediate Support at 1.3815/30
The euro came under pressure on Monday, as risk aversion drove up demand for currencies like the US dollar and Japanese yen. EUR/USD pulled back toward support at 1.3815/30, where there is the 38.2 percent fib of 1.2964 - 1.4340 and a rising trendline connecting the May and June lows. Meanwhile, there is notable resistance from a falling trendline connecting the 6/3, 6/11, and the 6/19 highs at 1.3975. European economic data was actually positive, as the Ifo institute's survey of German business confidence improved for the third straight month in June, as their index rose to match the November 2008 high of 85.9 from 84.3 due primarily to a surge in business expectations to an 11-month high of 89.5 from 86.0.
On Tuesday, Markit Economics is expected to announce that their composite reading for the Euro-zone's manufacturing and services sector rose to 44.9 for the month of June, marking the fifth straight improvement. That said, this would also mark the thirteenth straight month that the index held below 50, which indicates a contraction in activity. Nevertheless, better than anticipated results - especially a rise above 50 - could offer a boost to the euro amidst hopes that the worst has passed for the Euro-zone economy.
Related Article: Euro Weekly Trading Forecast
Commodity Dollars Plunge as FX Carry Trade Demand Wanes
The Australian dollar, New Zealand dollar, and Canadian dollar were the weakest of the majors as a lack of demand for carry trades sent the currencies down especially hard versus the US dollar and Japanese yen. The Canadian dollar was the only one to really see any economic releases, as Statistics Canada said that international securities transactions rose to a 3-month high of C$9 billion in April, indicating that foreign investors are still buying Canadian assets, especially bonds. Nevertheless, CADJPY broke below a rising trendline that has served as support since the beginning of the year and USDCAD cleared former support at the psychologically important 1.1500 mark.
Japanese Yen Dominates as DJIA Falls 2.4%, S&P 500 Plummets 3.1%
The Japanese yen dominated on Monday as risk aversion sent carry trades and equities tumbling, with the DJIA closing down 200 points at 8339.01. That said, sharp moves like this tend to see at least a brief period of consolidation the next day, but going forward there is potential for risky assets to continue falling lower. While 10 of the nation's biggest banks have returned $68 billion worth of TARP funds, there are still indications that not all is equal among US banks. Indeed, according to a press release published by the FDIC on May 27, their Problem List of troubled banks grew during the first quarter from 252 to 305 institutions, and total assets of problem institutions increased from $159 billion to $220 billion. As a result, it's important to keep the situation in perspective, as there are still significant downside risks to the health of the financial sector and the economy at large.
Related Articles: Equities and Carry Trade Topped, Japanese Yen Weekly Trading Forecast
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Written by: Terri Belkas, Currency Strategist for DailyFX.com