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Forex Analysis: Is Dollar Weakness After FOMC a Foregone Conclusion?

By , Currency Strategist
12 December 2012 09:12 GMT

Forex markets are positioned for a US Dollar selloff as the Federal Reserve expands stimulus efforts but such an outcome is not as assured as it may seem.

Talking Points

  • US Dollar to Rally vs. Majors if Fed Decides Against Unsterilized Bond-Buying
  • British Pound to Look Past Jobless Claims Data on Static BOE Outlook, FOMC
  • Japanese Yen Sinks as Asian Stocks Soar on Hopes for Fed Stimulus Expansion

Most major currencies were locked in narrow ranges in overnight trade as financial markets look ahead to the Federal Reserve monetary policy announcement to yield direction cues. At the heart of the decision will be the fate of the so-called Operation Twist program designed to re-target stimulus at lowering longer-term borrowing costs. This is done by swapping out short-term securities on the Fed’s balance sheet for long-dated ones at a pace of about $45 billion per month.

Twist is due to expire at year-end and the market consensus appears to be that it will be replaced with an equivalent-sized “unsterilized” bond-buying scheme. This means that unlike its predecessor, the new effort will not be balance-sheet neutral. Such an outcome is likely to be treated as a meaningful move to the dovish side of the policy spectrum, broadly weighing on the US Dollar against its major counterparts.

Importantly, the recent run of supportive US economic data – most critically the service-sector ISM and NFP data points – as well as an upbeat Beige Book survey suggest the door is open for the FOMC to pursue a less aggressive course. A decision to introduce an unsterilized program smaller than $45 billion or opt for a Twist-like program that does not swell the balance sheet stands weigh heavily on risk appetite and send the greenback higher.

Besides the fate of Operation Twist, traders will likewise look toward revisions in the rate-setting committee’s economic forecasts as well as the tone of Bernanke’s quarterly press conference for additional guidance. Bleak cues on either front may cap US Dollar gains in the event that policymakers take a less dovish path than investors are looking for, opening the door for added easing to be unveiled in 2013. Alternatively, signs of optimism may trim the buck’s losses if the fully unsterilized approach is indeed adopted and aggressively amplify its gains if the committee eschews balance-sheet expansion for now.

On the economic data front, UK Jobless Claims headline the European docket. Expectations call for a 7,000 increase in November, marking a narrow improvement from the 10,100 rise in the prior month. The outcome is unlikely to yield a meaningful reaction from the British Pound, with BOE policy expectations firmly anchored and traders looking ahead to the Fed announcement before committing to a strong directional bias.

The Japanese Yen stood apart from the near-standstill across the FX space in Asian trading hours, sliding as much as 0.6 percent against its leading counterparts as regional stock exchanges pushed higher and dented haven demand. The MSCI Asia Pacific added 0.5 percent amid hopes the Federal Reserve will step up easing efforts.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:30

AUD

Westpac Consumer Confidence (DEC)

-4.1%

-

5.2%

23:30

AUD

Westpac Consumer Confidence Index (DEC)

100.0

-

104.3

23:50

JPY

Machine Orders (MoM) (OCT)

2.6%

3.0%

-4.3%

23:50

JPY

Machine Orders (YoY) (OCT)

1.2%

-5.0%

-7.8%

23:50

JPY

Tertiary Industry Index (MoM) (OCT)

-0.1%

-0.4%

0.2% (R-)

23:50

JPY

Domestic CGPI (YoY) (NOV)

-0.9%

-0.9%

-1.0%

23:50

JPY

Domestic CGPI (MoM) (NOV)

0.0%

0.0%

-0.3%

0:30

AUD

RBA Credit Card Balances (A$) (OCT)

49.0B

-

49.1B

0:30

AUD

RBA Credit Card Purchases (A$) (OCT)

22.5B

-

19.5B

Euro Session: What to Expect

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

7:00

EUR

German CPI (MoM) (NOV F)

-0.1% (A)

-0.1%

Medium

7:00

EUR

German CPI (YoY) (NOV F)

1.9% (A)

1.9%

Medium

7:00

EUR

German CPI - EU Harmonised (MoM) (NOV F)

-0.2% (A)

-0.1%

Medium

7:00

EUR

German CPI - EU Harmonised (YoY) (NOV F)

1.9% (A)

2.0%

Medium

9:30

GBP

Claimant Count Rate (NOV)

4.8%

4.8%

Medium

9:30

GBP

Jobless Claims Change (NOV)

7.0K

10.1K

High

9:30

GBP

Weekly Earnings exBonus (3M/YoY) (OCT)

1.9%

1.9%

Low

9:30

GBP

Average Weekly Earnings (3M/YoY) (OCT)

1.9%

1.8%

Low

9:30

GBP

Employment Change (3M/3M) (OCT)

45K

100K

Low

9:30

GBP

ILO Unemployment Rate (3M) (OCT)

7.8%

7.8%

Medium

10:00

CHF

Credit Suisse ZEW Survey (Expectations) (DEC)

-

-27.9

Low

10:00

EUR

Euro-Zone Industrial Production (MoM) (OCT)

0.0%

-2.5%

Medium

10:00

EUR

Euro-Zone Industrial Production (YoY) (OCT)

-2.4%

-2.3%

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2951

1.3069

GBPUSD

1.6082

1.6155

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

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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12 December 2012 09:12 GMT