FOREX: Dollar Soars as Japan Intervenes, Traders Brace for Event Risk

Talking Points

• US Dollar Rebounds, on Pace to Deliver Best Trading Day in Three Months
• Stock Index Futures Decline, Hinting Risk Aversion to Keep USD Supported
• Euro Zone CPI, Chicago PMI and Dallas Fed Index Headline Data Calendar

The US Dollar raced higher overnight, adding as much as 1.7 percent on average against its leading counterparts. The stage for a rebound was set early in Asian hours as S&P 500 futures opened the trading week lower and moved downward, promising to underpin the safe-haven greenback. Some unwinding of pro-risk positioning was to be expected amid profit-taking after last week’s sharp improvement in sentiment. Protective repositioning likely played a role as well as traders braced for another week packed with headline scheduled event risk. The move’s aggressive momentum owed to an unexpected tailwind however as Japan intervened into USDJPY for the third time this year, with a surge of Dollar strength in that pair spilling over across the majors.

Looking ahead, the preliminary estimate of October’s Euro Zone Consumer Price Index reading headlines the economic calendar, with expectations calling for the annual inflation rate to slow to 2.9 percent after hitting a three-year high in the previous month. The release comes ahead of Thursday’s monetary policy announcement from the European Central Bank, the first to be led by newly-minted President Mario Draghi. At the moment, traders are betting policymakers will leave things unchanged, pricing in a mere 20.8 percent chance of a rate cut (according to data compiled by Credit Suisse). However, a soft CPI reading could go a long way toward bolstering expectations of a dovish outcome to weigh on the Euro.

The US data docket comes into focus in the second half of the European session, with Chicago PMI and the Dallas Fed Manufacturing Activity Index due to cross the wires. Conflicting outcomes are expected, with the former reading pointing to a narrow deterioration in the pace of regional manufacturing- and service-sector growth while the latter, which focuses exclusively on the factory sector, signals a narrow improvement in October. The figures will help set the stage for the higher-profile ISM survey readings as well as the closely-watched Nonfarm Payrolls jobs report due later in the week. As it stands, stock index futures are pointing sharply lower, hinting the US Dollar is likely to remain well-supported against its top counterparts.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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