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Dollar: Fed Forecasts and 1Q GDP Promising Breakout Catalysts

By , Chief Currency Strategist
21 April 2012 05:53 GMT
  • Dollar: Fed Forecasts and 1Q GDP Promising Breakout Catalysts
  • British Pound will Put Modest Hawkish Upgrade to the Growth Test
  • Australian Dollar Traders Have a Clear Expectation for Tuesday’s CPI
  • New Zealand Dollar Measured its Reaction to Inflation, How About the RBNZ?
  • Euro Traders Should Watch French Election, IMF Response and Crisis Headlines
  • Japanese Yen Not Seen as a High-Level Volatility Risk, Good Setup for the BoJ
  • Gold May Finally Find Impetus in Rate Decisions, Inflation and Growth Readings

Dollar: Fed Forecasts and 1Q GDP Promising Breakout Catalysts

With the dollar’s close this past Friday, it managed to carve out a weekly range that fit neatly within the breadth of the previous period, which in turn fit within its predecessor. In other words, the greenback has worked itself into significant congestion – the perfect setup for heavy event risk in a FOMC rate decision and US GDP reading to force a critical breakout. To assess the situation heading into this loaded week of trading, we first must understand the greenback’s stubborn congestion as of late. The lack of drive through risk trends is the most prominent disconnect. As long as the S&P 500 (as a benchmark for sentiment) is set adrift, a strong bull or bear run will be difficult to generate for the premier safe haven. A further complexity that has ensured the dollar can’t build any steam is the diminished premium of the subtle shift in rate expectations.

It is the recently deflated outlook for the an early exit to the Fed’s excessive stimulus regime that where we likely find the greatest potential for a meaningful change in the dollar’s tone – and possibly even in the character of underlying risk trend. Wednesday afternoon, the central bank is schedule announce the decision after its two day monetary policy deliberation. There is little doubt that the central bank will hold both rates and balance sheet unchanged. The real interest is in the updated forecasts for fund rates, growth and inflation that are also due, as well as Chairman Ben Bernanke’s press conference to follow. We have oscillated from a consensus for QE3 from the market ranks to a tentative outlook for a 2013 rate hike (insinuating a withdrawal of stimulus), but currently the views are more finely balanced. This could break that stalemate.

An outlook for accommodative policy for the foreseeable future or one of the most massive policy programs being worked down has direct implication for the currency, but it also directly taps into underlying risk appetite. Securing a clear break from equities is likely a requirement for the dollar itself to pick up a lasting drive, but so far 1Q earnings has proven unable. Perhaps everyone is waiting for Apple’s figures. If that isn’t the case, perhaps the advance reading of 1Q GDP can deliver. Though due Friday, it may be more impediment than catalyst.

British Pound will Put Modest Hawkish Upgrade to the Growth Test

After the Bank of England minutes tipped the scales away from expectations of another round of bond purchases come May, the sterling took to a notable climb. Yet, as we have seen with many currencies in similar positions, removing the burden of dovish policy does not necessarily translate into a hawkish regime. For that, we need an active catalyst to encourage appreciate. We won’t be seeing any hawkish/bullish favor on the monetary policy side of things, so perhaps the pound can compete on the fiscal/growth side. The UK took a gamble by proactively pursuing deficit reduction, and there have always been detractors to the effort. Depending on the 1Q GDP reading, policy approaches could be changed.

Australian Dollar Traders Have a Clear Expectation for Tuesday’s CPI

After the previous Reserve Bank of Australian (RBA) rate decision, Governor Glenn Stevens suggested to the markets that the probably for dovish action at the following (May) policy meeting was high; but an actual cut would depend on the state of inflation. The market has taken that to mean a cut for sure, but such a clear bias leaves the door wide open for surprise. To be sure, the sizable drop in the year-over-year, headline CPI figures (from 3.1 percent to 2.2 percent) would justify the 95 percent probability of a 25bp May rate cut, but does it clear the way for the 94 bps of cumulative cuts over the coming 12 months. Even if the market deftly prices in the next move, there is still wider berth further on.

New Zealand Dollar Measured its Reaction to Inflation, How About the RBNZ?

There is little chance of a change in policy from the exceptionally consistent RBNZ policy path according to the markets. That said, we are working with markets that are far more adept at working with the subtleties of the changes in expectation further out in the future. Looking at the adjustment error-size 5 percent probability of a rate cut and collective 9 bps of hikes seen over the coming year, it is clear that expectations are set to neutral. Yet, we’ve just recently seen a very weak CPI reading from New Zealand and China reported a significant slowdown in growth (an issue for all of Asia). Will Governor Bollard adjust for these developments? It’s a possibility that the market isn’t well positioned for.

Euro Traders Should Watch French Election, IMF Response and Crisis Headlines

Fears of financial crisis are starting to fade, though only in the financial headlines. If we look at the sovereign rates, we find clear trouble in the health of Spain certainly, but also Italy, Greece and Portugal. Notable through this past week, Spanish and Italian 10-year rates closed in on the six-percent market (the seven percent threshold is seen as the bailout mark); Greece’s four largest banks reported record losses on the order of €24 billion; and Portugal said it would not ask for lenient conditions similar to those for Greece. Clearly, there are still issues. However, we need action...catalysts. First stop is the French election, though that will likely just introduce a May 6 vote. We also have a notable round of data.

Japanese Yen Not Seen as a High-Level Volatility Risk, Good Setup for the BoJ

Another fundamental event that is flying under many traders radars (not surprising when advance quarterly GDP readings and contentious monetary policy decisions are vying for our attention) is the upcoming BoJ policy decision. At the last meeting, there was heavy speculation that the central bank would fold to government pressure and follow up with its February expansion of its asset purchase program hoping to exert the same force on the Japanese yen. The disappointment was clear when the group refused. This time around, there is little expectation for the same. Yet, if they deliver, that means many market participants will be caught off guard. That said, can such a move rouse the same reaction?

Gold May Finally Find Impetus in Rate Decisions, Inflation and Growth Readings

Whether we look at the daily or weekly chart, the constraint on gold is clear. The fresh, nine-month low from the CBOE’s gold ETF volatility index (16.7 percent) perhaps summarizes the situation best: that market conditions are too quiet. That is an interesting position to be in when the question of stimulus (and therefore the demand for an alternative store of wealth to traditional fiat currencies) comes up multiple times over the coming week. Volatility of course is a consideration, but the real concern is direction. A bearish move could crack a multi-year bull trend.

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

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

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

Producer Price Index (QoQ) (1Q)

0.3%

Producer prices may indicate lower CPI this coming week

1:30

AUD

Producer Price Index (YoY) (1Q)

2.9%

5:00

JPY

Coincident Index CI (FEB F)

93.7

Japanese economy still stable, growing moderately

5:00

JPY

Leading Index CI (FEB F)

96.6

5:00

JPY

Supermarket Sales (YoY) (MAR)

0.3%

Following convenience store data

6:45

EUR

French Own-Company Production Outlook (APR)

6

French surveys still trending weaker as debt fears cut into investment spending

6:45

EUR

French Production Outlook Indicator (APR)

-15

6:45

EUR

French Business Confidence Indicator (APR)

96

7:00

CHF

Money Supply M3 YoY (MAR)

6.4%

Broad M3 measure may grow

7:00

CHF

Real Estate Index Family Homes (1Q)

404.6

Swiss housing market capped

7:00

EUR

French PMI Manufacturing (APR P)

46.7

Purchasing indices may be stagnant, will await further developments

7:00

EUR

French PMI Services (APR P)

50.1

7:30

EUR

German PMI Manufacturing (APR A)

48.4

7:30

EUR

German PMI Services(APR A)

52.1

8:00

EUR

Eurozone PMI Composite (APR A)

49.1

8:00

EUR

Eurozone PMI Manufacturing (APR A)

47.7

8:00

EUR

Eurozone PMI Services (APR A)

49.2

8:00

EUR

Italian Consumer Confidence Ind. Sa (APR)

96.8

Italian spending weaker

9:00

EUR

Euro-Zone Govt Debt/GDP Ratio (2011)

85.4%

Austerity targeting lower ratio

12:30

CAD

Wholesale Sales MoM (FEB)

-1.0%

Domestics seen weaker

22:45

NZD

Net Migration SA (MAR)

-440

Weaker AU seen affecting

23:50

JPY

Corp Service Price Index (YoY) (MAR)

-0.6%

Corporate services still weak

GMT

Currency

Upcoming Events & Speeches

SUN

EUR

French Presidential Election

10:00

EUR

Bundesbank Publishes Monthly Report

13:30

EUR

ECB Announces Bond Purchases

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

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

16.5000

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.1010

1.7930

7.8123

7.7606

1.2484

Spot

6.6864

5.6273

5.7170

Support 1

12.5000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

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

1.3359

1.6252

82.35

0.9189

1.0007

1.0496

0.8282

109.17

133.00

Resist. 2

1.3324

1.6220

82.14

0.9164

0.9986

1.0467

0.8257

108.82

132.61

Resist. 1

1.3289

1.6187

81.93

0.9139

0.9965

1.0438

0.8233

108.48

132.22

Spot

1.3219

1.6122

81.52

0.9089

0.9924

1.0380

0.8185

107.79

131.43

Support 1

1.3149

1.6057

81.11

0.9039

0.9883

1.0322

0.8137

107.10

130.65

Support 2

1.3114

1.6024

80.90

0.9014

0.9862

1.0293

0.8113

106.76

130.26

Support 3

1.3079

1.5992

80.69

0.8989

0.9841

1.0264

0.8088

106.41

129.87

v

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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21 April 2012 05:53 GMT