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Dollar Uninspired by Increasingly Hawkish Fed Rhetoric

By , Chief Currency Strategist
27 June 2014 04:50 GMT

Talking Points:

  • Dollar Uninspired by Increasingly Hawkish Fed Rhetoric
  • British Pound Responds to a BoE Tightening…Sort Of
  • Euro Rates Hit a 12-Month Low, Bond Yields a Record Low

Dollar Uninspired by Increasingly Hawkish Fed Rhetoric

Though the pace of its retreat cooled this past session, the dollar nevertheless extended its decline. The Dow Jones FXCM Dollar Index (ticker = USDollar) edged 8 points lower to technically close at its lowest level in seven weeks. However, like most breaks occurring in these market conditions – regardless of asset class and direction – there was a material lack of conviction. We can see the same hesitation to turn drift into trend amongst the greenback’s pairings. Despite a burst of volatility, EURUSD has kept to its range. Meanwhile, GBPUSD, AUDUSD and USDJPY all seem to be unfazed by their proximity to major technical levels. Under normal conditions, this would likely catalyze to a breakout or reversal in short order. Yet, we know current conditions are far from ‘normal’.

Putting aside the prominent fundamental themes and the enticing technical patterns, the overriding trait of the financial markets right now is activity. Volatility measures have been trending down for months in a systemic slump for fear and speculative opportunity. This is only exacerbated by the seasonal ‘summer doldrums’ which will be particularly draining next week with a Friday Independence Day holiday in the US encouraging liquidity in the financial center to drain well in advance of the actual market closure. It is difficult to normalize even extreme inactivity when there isn’t a market to fuel swings.

Market conditions aside, the dollar’s fundamental appeal improved materially this past session – at least on the relative monetary policy front. The Fed’s first rate hike will not come when the unemployment rate hits a certain level but when inflation pressures the central bank to remove accommodation. The central bank’s preferred inflation reading – the Personal Consumption Expenditures Deflator or PCE – showed a pickup in pace for the headline reading to 1.8 percent with a 1.5 percent uptick in the core. These are still both below the central bank’s medium-term target of 2 percent, but St Louis Fed President James Bullard remarked that we would likely be above that level next year. In fact, he believed circumstances would necessitate a hike by 1Q 2015. Richmond Fed President Jeffrey Lacker proffered a hawkish view of his own – though not quite as aggressive. Next week, we will see the same high profile rate speculation with NFPs vs tepid market conditions with July 4th.

British Pound Responds to a BoE Tightening…Sort Of

The Bank of England took steps to curb inflation…in the housing market. Normally, a move to halt price growth would be an interest rate hike; but such a blunt instrument would carry too much collateral damage for the central bank to implement now. While that first benchmark rate increase is on the horizon, concern over the state of the UK housing sector (a bubble that will go unlabeled by officials) demanded a move now. BoE Governor Mark Carney announced a first step to limit loan-to-income ratios and to refuse loans that fail a stress test (a 3 percentage point rate increase). The stress test insinuates hawkish intentions; but this move also obviates a first hike to answer housing fears

Euro Rates Hit a 12-Month Low, Bond Yields a Record Low

The 3-month Euribor rate – a market standard – has dropped to a 12-month low as the ECB’s recent accommodation shift continues to lower the baseline for returns in the Eurozone. Yet, just because the broader rate of return is dropping doesn’t mean the speculative options have suddenly disappeared in the region. As two-year Spanish yields slip to fresh record lows, we see the appetite for risky exposure in the ‘periphery’ remains. This is a crowded trade however and fully dependent on persistent risk appetite. Confidence will break eventually.

Yen Crosses: What Can Move This Market?

Japan released a flood of data this morning that reflects both on economic activity and monetary policy. The country’s unemployment rate dropped to its lowest level in nearly 17 years (3.5 percent), but the tax hike in April had also led to the second biggest drop in household spending on record (8 percent). From the National CPI figures, we find core inflation above the BoJ’s target at 2.2 percent and headline running hot at 3.7 percent. None of this moved the yen crosses. So what can motivate the Japanese currency? Risk trends.

Australian Dollar Struggling for Progress, RBA Ahead

The Australian 10-year government bond yield has collapsed to a 12-month low and the Australian dollar has struggled to make bullish progress. This lack of performance comes despite a prominent rise in equities; but for a carry trade currency to ride the yield current, it needs yield. A rate hike isn’t necessary for bulls, but an outlook for tightening is in this low rate environment. Next week the RBA may give us that time frame.

Emerging Market Currency Split Reflects Volatility Conditions

With volatility in retreat, we are witnessing not just a drop in fear. We are also seeing a curb on ‘risk appetite’. The lack of commitment one way or the other has led the MSCI Emerging Market Index to congestion and the lowest volume since the Christmas holiday. In the currency rankings, momentum was absent; but a few – the Brazilian Real and Russian Ruble – managed to set new multi-month highs.

Gold: The Biggest Rally in 9 Months, Then a Return to Extreme Quiet

Just a week ago, gold put in for its biggest daily rally since September on strong volume – a move that cleared a general bear trend months in the making. And since that surge, the precious metal has gone virtually no where. Of interest, futures open interest has shown a consistent climb over the past weeks. The past few times this has happened, we have seen the market put in tops – likely a reflection of short-tem spec interest.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

CNY

Industrial Profits (YTD) (YoY) (MAY)

10.0%

A drop in credit growth in recent months likely signals a slowing in profits as revenue growth levels out

1:30

CNY

Industrial Profits (YoY) (MAY)

9.6%

6:00

EUR

German Import Price Index (MoM) (MAY)

0.0%

-0.3%

Upstream inflation pressures will be rendered less influential by the CPI data due later

6:00

EUR

German Import Price Index (YoY) (MAY)

-2.2%

-2.4%

6:45

EUR

French Gross Domestic Product (QoQ) (1Q F)

0.0%

0.0%

French economic figures expected to remain soft as the Eurozone core attempts to carry a still-struggling ‘periphery’

6:45

EUR

French Gross Domestic Product (YoY) (1Q F)

0.8%

0.8%

6:45

EUR

French Consumer Spending (MoM) (MAY)

0.3%

-0.3%

6:45

EUR

French Consumer Spending (YoY) (MAY)

-1.0%

-0.5%

6:45

EUR

French Producer Prices (MoM) (MAY)

-0.1%

6:45

EUR

French Producer Prices (YoY) (MAY)

-0.9%

7:00

CHF

KOF Leading Indicator (JUN)

100

99.8

Seen rising for first time in 4 months

7:00

EUR

Spain Consumer Price Index (YoY) (JUN P)

0.1%

0.2%

A proxy for periphery deflation

8:00

EUR

Italian Business Confidence (JUN)

99.8

99.7

Italian economic confidence has taken a notable departure from the EZ’s general improvement these past months

8:00

EUR

Italian Economic Sentiment (JUN)

86.9

8:30

GBP

Gross Domestic Product (QoQ) (1Q F)

0.8%

0.8%

Final readings of UK 1Q GDP are not expected to produce the same magnitude of adjustments as the US data offered Wednesday, but changes to the components is likely

8:30

GBP

Gross Domestic Product (YoY) (1Q F)

3.1%

3.1%

8:30

GBP

Current Account (Pounds) (1Q)

-17.0B

-22.4B

8:30

GBP

Index of Services (MoM) (APR)

0.3%

0.4%

8:30

GBP

Index of Services (3Mo3M) (APR)

0.9%

0.9%

8:30

GBP

Total Business Investment (QoQ) (1Q F)

2.7%

2.7%

8:30

GBP

Total Business Investment (YoY) (1Q F)

8.7%

8.7%

9:00

EUR

Euro-Zone Economic Confidence (JUN)

103.0

102.7

Despite the need for stimulus from the ECB, Eurozone economic sentiment is expected to rise further to a three-year high

9:00

EUR

Euro-Zone Business Climate Indicator (JUN)

0.40

0.37

9:00

EUR

Euro-Zone Industrial Confidence (JUN)

-3

-3

9:00

EUR

Euro-Zone Consumer Confidence (JUN F)

--

--

9:00

EUR

Euro-Zone Services Confidence (JUN)

4

3.8

12:00

EUR

German Consumer Price Index (MoM) (JUN P)

0.2%

-0.1%

As the Eurozone’s largest member, growth and inflation readings in Germany resonate for the region’s monetary policy bearings

12:00

EUR

German Consumer Price Index (YoY) (JUN P)

1.0%

0.9%

12:00

EUR

German CPI - EU Harmonised (MoM) (JUN P)

0.2%

-0.3%

12:00

EUR

German CPI - EU Harmonised (YoY) (JUN P)

0.7%

0.6%

12:30

CAD

Industrial Product Price (MoM) (MAY)

-0.2%

Upstream inflation pressures are presenting little pressure on the BoC to change its dovish tone

12:30

CAD

Raw Materials Price Index (MoM) (MAY)

0.1%

13:55

USD

U. of Michigan Confidence (JUN F)

82.0

81.2

Revisions generally carry less impact

GMT

Currency

Upcoming Events & Speeches

7:00

EUR

EU Leaders Hold Summit

10:00

EUR

ECB Publishes 3-Year LTRO Repayment

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.0103

2.1316

10.5846

7.7517

1.2488

Spot

6.7368

5.4694

6.1334

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

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

1.3703

1.7085

102.38

0.8980

1.0772

0.9466

0.8831

139.58

1336.01

Res 2

1.3685

1.7061

102.23

0.8967

1.0759

0.9450

0.8815

139.36

1331.55

Res 1

1.3667

1.7038

102.07

0.8954

1.0746

0.9434

0.8798

139.14

1327.09

Spot

1.3631

1.6991

101.77

0.8927

1.0721

0.9402

0.8765

138.71

1318.18

Supp 1

1.3595

1.6944

101.47

0.8900

1.0696

0.9370

0.8732

138.28

1309.27

Supp 2

1.3577

1.6921

101.31

0.8887

1.0683

0.9354

0.8715

138.06

1304.81

Supp 3

1.3559

1.6897

101.16

0.8874

1.0670

0.9338

0.8699

137.84

1300.35

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

Sign up for John’s email distribution list, here.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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27 June 2014 04:50 GMT