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Dollar Tumbles after Fed Mouthpiece Suggests Fed Guidance Change

By , Chief Currency Strategist
26 July 2013 02:32 GMT
  • Dollar Tumbles after Fed Mouthpiece Suggests Fed Guidance Change
  • British Pound: Why a Drop after UK 2Q GDP Hits Robust Expectations?
  • Euro: Greece Moves to Ensure EU Rescue Payout Approval Friday
  • Australian Dollar Suffering as Confidence in RBA Rate Hikes Builds
  • Japanese Yen: BoJ Seeing Success as Inflation Rises, But Not Yen Crosses…
  • New Zealand Dollar Post-RBNZ Rally to Best Day in 13 Months
  • Gold Eases Higher as Hilsenrath Revives Taper Talk, Gold Producer Suffers Low Prices

Dollar Tumbles after Fed Mouthpiece Suggests Fed Guidance Change

The dollar was slowly retracing the previous session’s undeserved strength Thursday when the market caught wind of a ‘Taper’ headline. Later in the US trading session, Wall Street Journal report Jon Hilsenrath – considered the unofficial mouthpiece for the Fed – released a report suggesting the Federal Reserve would keep its $85 billion-per-month stimulus program untouched next week and that they would look to ‘refine’ their ‘easy-money message’. Waking the market up from its volatility lull was worth a market-wide selloff for the dollar and a few enticing technical breakouts from pairs like USDJPY and GBPUSD. However, there is likely little more to be garnered from this newswire item than a jolt from traders asleep at the wheel. There was an exceptionally low probability that the central bank would have Tapered at its July meeting – economists and speculators that do expect it ‘soon’ expect it will happen at the September gathering. Furthermore, clarifying the message that the central bank will not raise rates for some time misses the object of the market’s focus. Interest is in the first reduction in the ongoing QE3 program as that will be the first step towards the eventual exit – and speculators are forward-looking animals.

British Pound: Why a Drop after UK 2Q GDP Hits Robust Expectations?

According to the Office for National Statistics, the United Kingdom’s economy grew 0.6 percent through the second quarter. That doubles the pace of the previous period and firmly cements a counter argument against the perpetual bears that believe the country’s competitiveness is waning and the Bank of England (BoE) will be forced to ramp up its stimulus effort. The threat of a ‘Triple Dip’ recession through the beginning of the year reinforced the belief that the central bank would have to join the Fed and BoJ to offset its counterparts’ efforts – a move that would exacerbate the weakness of the currency. Yet, we are seeing more and more evidence that those fears were overblown. If this GDP figure supports a future that doesn’t have stimulus ballooning, why has the sterling not rallied? Coming out ‘in-line’ with expectations somewhat disarms the release. Furthermore, there is likely a sense of distraction as traders look forward to the BoE rate decision next week.

Euro: Greece Moves to Ensure EU Rescue Payout Approval Friday

There were a few fundamental highlights for the euro this past session, but it didn’t seem to give Euro traders a unified bearing. Top news was the report that the Greek Parliament passed a measure that transferred several thousand public sector employees over to a ‘special labor reserve’. According to the Eurogroup head Dijsselbloem, this was the last of 22 required points of progress required from Greece to unlock the EU’s next €2.5 tranche of aid. Officials are expected to meet Friday to discuss the release having delayed it this past Wednesday. This is unlikely to prove a market-moving event unless it doesn’t go through. Meanwhile, the IMF called on the Eurozone to expand its stimulus effort and cut rates – a recommendation that will be ignored – while Spain reported a much-needed drop in the unemployment rate.

Australian Dollar Suffering as Confidence in RBA Rate Hikes BuildsIt seems that the Australian dollar is never short of a reason to have bears pummel it (New to Forex? Watch this video). While sentiment – and thereby the appetite for yield – have leveled off, the currency is finding its ‘return potential’ fade. Following on the 2Q CPI figures from earlier this week, we find participants in the rates market now see a 71 percent probability of the RBA cutting its benchmark lending rate another 25 bps to 2.50 percent on August 6. We have seen that level of certainty since October. Reflecting the Aussie dollar’s fading yield appeal, the benchmark 10-year government bond yield has shown a notable lethargy compared to others, like New Zealand. The yield shortfall of the Aussie benchmark to its New Zealand counterpart is currently 45 bps – near the widest in four years.

Japanese Yen: BoJ Seeing Success as Inflation Rises, But Not Yen Crosses…

Data is giving the Bank of Japan (BoJ) and Japanese government a needed boost of confidence. Not only have we seen improvements in business activity, trade and other economic figures; we are seeing the beginnings of sticky inflation. The Ministry of Internal Affairs released the June CPI figures to a distinctive increase in pressure. The headline figure showed 0.2 percent annual price growth for the first positive growth in 13 months. When fresh food was extracted, inflation rose 0.4 percent – the fastest pace of expansion since November 2008. Though the central bank’s target is 2.0 percent, this is encouraging for a country that has struggled with deflation for two decades. This is early evidence of a successful monetary and financial policy…but the FX market doesn’t seem impressed. Yen crosses were unmoved by the data. The level of stimulus is fixed and a return to inflation means eventual rate hikes – not good for a funding currency.

New Zealand Dollar Post-RBNZ Rally to Best Day in 13 Months

While the Reserve Bank of New Zealand’s rate decision Thursday morning didn’t rouse an immediate surge in volatility behind its benchmark currency after the release, there was a considerable consistency behind its drive as the day wore on. Through the end of New York trading, NZDUSD posted an enormous152-pip or 1.9 percent rally – the biggest notional advance since November 30, 2011and percentage climb since June 6, 2012. Where did this drive come from? While the headline from the central bank’s statement was for a hold on benchmark rates through 2013, the market is growing more certain in its outlook for an eventual rate hike. The jump in the 10-year NZ government bond yield above 4.2 percent and swaps pricing in a 56 bps worth of hikes for a 12 month period forward reflects that hawkishness.

Gold Eases Higher as Hilsenrath Revives Taper Talk, Gold Producer Suffers Low Prices

With the return of speculative murmurings about what the Federal Reserve is planning thanks to Jon Hilsenrath, gold managed to regain some traction this past session. There are two speeds at which this event risk could affect the commodity. On one hand, the market could interpret the stimulus headlines as a definitive shift in the central bank’s bearings; and the ‘alternative store of wealth’ would have found an independent drive. Such an interpretation could have carried us to new highs and towards $1,400. What we witnessed was the alternative understanding: a quiet market stirred to life by offhanded comments that don’t alter the forecast. Under this gear, the metal simply took advantage of the dollar drop – as most of its crosses did. In other news, the low price of the precious metal is hurting more than diehard bulls. Goldcorp – the largest producer of the precious metal – announced a $1.96 billion write down in its assets value through second quarter earnings numbers.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:45

CNY

MNI Business Sentiment Indicator (JUL)

With HSBC PMI data disappointing on Wednesday, prospects for any improvement in Chinese data look weak.

6:45

EUR

French Consumer Confidence Indicator (JUL)

79

78

The indicator has been on the decline since August of 2012.

13:55

USD

U. of Michigan Confidence (JUL F)

84.0

83.9

The indicator has improved greatly from April’s print of 76.40.

SAT

1:30

CNY

China Industrial Profits (YTD) (YoY) (JUN)

12.3%

With speculation that balance sheets of weak companies in China are being propped up, this indicator may be one of the few positive prints out of the nation.

GMT

Currency

Upcoming Events & Speeches

1:00

AUD

Australia to Sell A$700 Mln in 10-Year Bonds

9:00

EUR

Italy to Sell Inflation Linked Bonds

-:-

EUR

EU Greece Aid Payment Decision (Delayed from Wed)

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 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.4800

2.0000

10.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2000

1.9500

10.2500

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.8248

1.9532

9.9898

7.7565

1.2611

Spot

6.6645

5.7005

6.0533

Support 1

12.6000

1.9100

9.3700

7.7490

1.2000

Support 1

6.0800

5.6075

5.9365

Support 2

12.0000

1.6500

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.7400

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3207

1.5321

100.65

0.9579

1.0466

0.9268

0.7945

131.66

1315.85

Res 2

1.3176

1.5284

100.28

0.9553

1.0444

0.9238

0.7918

131.18

1307.84

Res 1

1.3145

1.5246

99.91

0.9527

1.0422

0.9208

0.7891

130.71

1299.83

Spot

1.3084

1.5172

99.18

0.9475

1.0378

0.9149

0.7838

129.76

1283.80

Supp 1

1.3023

1.5098

98.45

0.9423

1.0334

0.9090

0.7785

128.81

1267.77

Supp 2

1.2992

1.5060

98.08

0.9397

1.0312

0.9060

0.7758

128.34

1307.84

Supp 3

1.2961

1.5023

97.71

0.9371

1.0290

0.9030

0.7731

127.86

1315.85

v

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

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

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26 July 2013 02:32 GMT