Dollar Another Dramatic Rally Stalls without a Definitive Risk or Fundamental Trend

Dollar: Another Dramatic Rally Stalls without a Definitive Risk or Fundamental Trend
The US Dollar made a weak attempt at repeating the rally that opened the week; but the run once again fall short of reviving the bull trend that has been sidelined for the past three weeks now. In fact, the greenback’s eventual retracement from intraday highs would threaten a more meaningful bearish reversal. Amongst the majors, notable dollar support was under pressure for EURUSD, USDJPY and AUDUSD through the end of Tuesday’s active session. This is a dramatic reversal of fortunes for the world’s most liquid currency on an intraday basis; but put in context of price action over the past few weeks, this high volatility still falls within the bounds of a well-worn range that reflects the indecisive state of underlying risk appetite that has burdened the capital markets for nearly a month now. Offering a similar assessment of investors’ taste for risk appetite in a cautious world, the Dow Jones Industrial Average would retrace nearly all of its gains through the first half of the active trading session and subsequently failed to make progress on a push above 10,400; while crude failed to capitalize on a six-week high and returned to its tight, two-week horizontal range. Yet from all three major asset classes, there was a tentative but tangible effort to jumpstart a build in speculative positioning. This promise is borne from a slow build in confidence in the outlook for growth through economic data and credible progress on some of the largest threats to global financial security. Greece is likely still the most likely source of potential trend.

As for the concrete macroeconomic offerings from the US docket today; Tuesday proved the lull of the week. There were no major market-moving indicators scheduled for release; but there was notable Fed commentary to absorb. Kansas City Fed President Thomas Hoenig (notably a voting member of the Federal Open Market Committee this year) maintained his well-known hawkish bias in remarks delivered today. Once again the policy maker criticized the Board’s for pledging an “extended period” for keeping interest rates low. Hoenig went on to suggest that an essentially zero interest rate policy was “non-sustainable” and suggested the central bank should eventually hike even if unemployment is still high. Drawing a notable contrast to the Hoenig’s warnings, Dallas Fed’s Fisher said in an interview said he was “less worried” about short-term inflation and maintained concern over the health of the economy. On the topic of the ‘extended period’ phrase, the central banker said he “wasn’t in favor of that language from the beginning;” but Fisher nonetheless maintained that rates would need to be kept low for “some time” until the economy recovers. Timing surrounding the FOMC’s eventual turn to a hawkish is no doubt a critical factor in the currency’s strength – perhaps eventually rivaling risk appetite trends – but consistent language and moves to withdrawal stimulus before turning to monetary policy has tempered hike forecasts. Fed Fund futures show a 10 percent chance of a quarter-point hike by the June 23rd meeting. Looking out over the coming 12 months, the market is pricing in a meager 58 basis points of tightening – the most dovish outlook since December 2nd.

Related: Discuss the US Dollar in the DailyFX Forum, Dollar Awaits a Clear Read on Risk and Rate Forecasts

Euro May Finally Find Direction on Greece’s Additional Deficit Cuts
With the European Central Bank expected to weigh in on potential changes to monetary policy this Thursday, today’s inflation data did little to advance the case for a return to a hawkish regime. Carrying the most weight for policy officials was the Euro Zone CPI estimate for February. The advanced consumer-level inflation report cooled to a 0.9 percent annual pace as expected, for the first downtick in five months. In similar fashion, the yearly reading of the factory gate PPI price gauge was negative (-1.0 percent) for the 13th consecutive month, even if the monthly number recorded its biggest, positive jump since July of 2008. Given the central bank’s reticent stance on policy with potential growth and financial stability troubles, these readings are ultimately folded into a lasting and week policy stance. The true potential for euro-based volatility going forward rests with policy miscues or progress on the Greek deficit situation. Reports quoting anonymous sources suggested the nation’s government is planning on announcing up to 4.8 billion euros in additional cuts tomorrow. This move comes in response to increased EU pressure for the local government to do more and ahead of a planned meeting between Greek Prime Minister Papandreou and German Chancellor Merkel on Friday. This move will certainly raise the ire of Greek citizens; and in the long-term it does not guarantee this particular member will avoid a potential default later down the line. Nonetheless, speculators often respond to quick fixes when looking for a retracement.

Pound Extends its Worst Trend in 16 Months as Data, BoE Meeting Approaches
Though GBPUSD would retrace much of its intraday losses Tuesday, the session would nonetheless close in the red and officially extend the pair’s worst trend in 16 months. The fundamental health of the United Kingdom and its currency are severely diminished by the expected gridlock that could come out of the general election that must by early June. Clearly struggling to jumpstart the economy, a hung parliament will struggle to turn the focus on the appropriate steps to reducing the national deficit and thereby improve the perceived financial health of the economy. On the other hand, the nation-specific troubles the UK is suffering could work to tighten the pounds correlation to underlying risk trends – fortuitous turn of events if sentiment does indeed rebound. Otherwise, the focus will remain on Thursday’s BoE policy decisions.

Australian Dollar Marks a Tepid Response to an RBA Hike and Strong 4Q GDP
Reflecting the power that speculation can have on price action, the Australian dollar would offer an extremely limited response to a quarter-point rate hike from the RBA to 4.00 percent and a 2.7 percent, strong-than-expected rate of yearly growth through the fourth quarter. Wouldn’t these two prominent developments further the Aussie dollar’s status as the fundamental leader amongst an otherwise lackluster FX group? Not if these results were expected and fully priced in. This limited reaction may indicate that extending this currencies trend will be far more difficult.

Canadian Dollar Advances as BoC Commentary Fosters Hike Speculation
In contrast to the Australian dollar’s non-existent reaction to an actual hike, the Canadian currency was far more response to a Bank of Canada announcement that would ultimately involve no meaningful move towards tightening the reins. What was the difference between the two? The BoC’s commentary prompted a change in stance with a more optimistic read on growth and inflation. So, while the authority suggested rates will likely be maintained at least until June, the commentary was altered just enough to invite speculation for a near-term rate hike.

For Real Time Forex News, visit: http://forexstream.dailyfx.com/

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar





 
Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com