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The 2 Primary Dollar Catalysts This Week

The 2 Primary Dollar Catalysts This Week

Kathy Lien, Technical Strategist

Upcoming speeches by key Fed officials and the ongoing debt ceiling debate in Washington could produce sizable dollar price swings this week, even without much economic data set for release.

The focus in the forex market is on the euro (EUR), and rightfully so given this weekend's German elections and this morning's Eurozone PMI reports. Economic activity in the Eurozone accelerated in the month of September, fueling hopes that the region is poised for a stronger recovery that could bridge the gap between European Central Bank (ECB) and Federal Reserve monetary policies.

However, today’s Eurozone PMI numbers were mixed, with manufacturing activity slowing, and now, given last week’s Fed decision not to taper asset purchases, it will be a long time before ECB and Fed policies are aligned.

There's not much in the way of US economic data this week, but that does not preclude the potential for dollar-driven volatility in the forex market.

To start, we have a number of US policymakers scheduled to speak this week, and their comments could continue to shape the market's expectations for Fed tapering. Today alone, Fed Presidents Dennis Lockhart (Atlanta), William Dudley (New York), and Richard Fisher (Dallas) will be speaking, but of the three, Dudley was the only one to vote at last week's Federal Open Market Committee (FOMC) meeting. He is generally more dovish than his peers so it will be interesting to see if he also believes that the central bank could reduce asset purchases this year.

Last week, we heard from FOMC voters Esther George and James Bullard, and both seem to support a reduction in 2013. George said she actually dissented from the last decision and criticized the central bank for not following through with its signals to the market, saying that it erodes the intent of policy, creating confusion and disconnect.

Bullard did not slam the Fed's actions, but he made it clear that the Fed could still taper as early as October. He said the decision this month was a close one, and since the central bank did not feel that $10 billion is a big deal, it decided to just forego the move.

See related: A Fed Taper Scenario Few Expected

The main takeaway from the comments was that a reduction in asset purchases before the end of the year is still on table, and this could limit US dollar (USD) losses and maybe even produce USD gains this week. We will be watching the ongoing comments from Fed policymakers this week to see if other central bank officials share George and Bullard's views.

Debt Ceiling Debate Rages on

The main risk for the dollar this week will be the ongoing developments in Washington. The House ended last week by passing a stopgap spending bill that would fund the government until the end of the year, but it would also withhold all funds from Obamacare. This was widely viewed as the first shot fired in what will undoubtedly be a long and contentious debt ceiling debate.

With only eight days to go before the government runs out of cash, the stakes are high, as large parts of the government could be shut down on October 1, which poses the risk of the first ever US default.

We've been down this road before, however, and an extension or deal has been reached every single time. It’s a very serious problem, but we believe that at the end of the day, the impact on the dollar should be small. Of course, if politicians cannot put their differences aside and reach a compromise, the financial markets and the dollar would be in big trouble, although we think that this unlikely and an eleventh-hour deal will most likely be reached.

See also: 2 All-Too-Familiar Crises We’ve Dodged Before

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.