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Forex: Dollar - The Chance of a Change in Tone from the FOMC Minutes is Low but Risk High

Forex: Dollar - The Chance of a Change in Tone from the FOMC Minutes is Low but Risk High

2011-02-16 05:29:00
John Kicklighter, Chief Currency Strategist
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  • Dollar: The Chance of a Change in Tone from the FOMC Minutes is Low but Risk High
  • British Pound Surges after CPI Data, Volatility Threat Still Critical With BoE Report Ahead
  • Euro Holds Steady Through Inline German GDP Figures, Plunge in Greek Economy
  • Japanese Yen Drops Across the Board Despite Upgrade in BoJ’s Economic Outlook
  • Canadian Dollar will Show a Restrained Response to Second Tier Round of Data
  • New Zealand Dollar Traders Prepare for Upstream Inflation , Business Activity Figures

Dollar: The Chance of a Change in Tone from the FOMC Minutes is Low but Risk High

Once again, the dollar’s path and pace were determined by outside fundamental forces. It is easier to distinguish the benchmark currency’s attachment to underlying fundamental drivers when we reflect on the lack of price action following what was undeniably an important round of scheduled US economic event risk Tuesday. Looking at price action itself, the dollar was primed for a breakout. Not only were the risk-sensitive AUDUSD and NZDUSD pairs on the verge of prominent trend reversal; but the liquid and more fundamentally-guided EURUSD and GBPUSD were at the very edge of dollar-favorable reversals while the risk appetite-neutral Japanese yen and Swiss franc denominated majors were staring down meaningful resistance levels. With the first fundamental tide already passed, we see that these liquid pairs remain anchored to congestion – even if a few have tested technical boundaries. Perhaps the US can take control of its own bearings with Wednesday’s event risk.

For traders, there were two notable takeaways from the fundamentals developments Tuesday and the dollar’s subsequent response. First and foremost, we should keep a wary eye on risk appetite trends. The persistent concern over Chinese economic and asset inflation (the change in the government’s CPI weightings doesn’t fool anyone), underwhelming European growth readings and US data falling short of its targets eventually led to a 0.3 percent slump from the benchmark S&P 500. This doesn’t present much of a threat to the remarkable five-month rising trend; but it reminds us of how extended the market and sentiment are. From the data itself, the headline retail sales data from January fell short of the consensus; but at 0.3 percent growth, it nonetheless marks the seventh consecutive month of growth for consumption. This is yet another piece of data that suggests the economy is establishing a steady pace of expansion. As for the 5.3 percent-reading from the import inflation report and the TIC capital flows data, the contribution to a bullish economic and hawkish interest rate outlook are relatively modest.

Looking ahead to the upcoming US trading session, we may have a sleeper event that can drive the dollar via locally-sourced developments. Readings for housing starts, factory-level inflation and industrial production are all notable; but they won’t materially alter the general consensus for relative growth potential or interest rate speculation. On the other hand, the FOMC minutes could carry a surprising level of influence. While we already know the outcome from the last meeting and there is a very small chance they will change their tone about monetary policy going forward; the leveraged reaction to a specific (if minor) alteration makes this an event to watch. A scenario developed by Goldman Sachs is that the policy authority may make reference to the eventual exit strategy for stimulus. This does not mean the Fed will be withdrawing QE2 early nor does it imply that the group will put a hard date on when the policy reins will be pulled in. Yet, that isn’t exactly necessary with speculators. Just as surely as traders speculated months in advance of the official QE2 announcement, they will unwind at early signs of the exit.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: CADJPY and NZDUSD Additions, EURUSD and GBPUSD Tentative

British Pound Surges after CPI Data, Volatility Threat Still Critical With BoE Report Ahead

Though the pound initially slipped after the release of its consumer-level inflation figures, interest rate speculators quickly replaced the face-value fundamental traders. A perfunctory review of the morning’s inflation shook out the overly sensitive speculative traders as the headline year-over-year figure merely printed inline with a 4.0 percent reading while the core measured was slightly under at 3.0 percent. Had this been a regular indicator; a correction would have been the appropriate response. However, the hawkish rate bias is too prevalent for this to be seen as a bearish outcome. With BoE Governor King noting in his fifth letter to the Chancellor of the Exchequer that there is a “great deal of uncertainty” on price pressures; there is more than enough evidence here to support intense speculation of an impending rate hike. This threat will be at the forefront of sterling fundamental conversation when the central bank releases its Quarterly Inflation report in the upcoming London session. Even a modest upgrade of their hawkish bias will amplify the already leveraged rate forecast. In the meantime, don’t ignore the labor data.

Euro Holds Steady Through Inline German GDP Figures, Plunge in Greek Economy

For all currencies, there is a dominant fundamental driver (aside from risk appetite) that defines its future. For the euro, that theme is still the region’s financial stability. However, without a perceptible crisis event for one of the members or swelling rates for the entire region, it is difficult to mark progress. That is where the 4Q GDP figures come in. They give us an economic perspective on what financial difficulty means for the group. Yet, with German and Euro-Zone GDP numbers printing close to consensus and Greece tumbling deeper into recession; market participants didn’t see reason to materially change positions. Perhaps the upcoming Portuguese bill sale will hit closer to home.

Japanese Yen Drops Across the Board Despite Upgrade in BoJ’s Economic Outlook

Along with the Bank of Japan’s decision to hold the country’s benchmark lending rate unchanged at 0.10 percent, the credit loan program at 30 trillion yen and asset purchase facility at 5 trillion; the policy authority would also raise its growth assessment for the first time in nine months. Yet, the bank’s modest words seem to have reminded traders of the currency’s funding position and financial trouble rather than boost faith.

Canadian Dollar will Show a Restrained Response to Second Tier Round of Data

We are still a couple days out from the release of Canada’s January CPI data – economic data that can actually alter the still-buoyant 12 month forecast for 80 basis points worth of rate hikes from the Bank of Canada. In the meantime, loonie traders will make do with a growth update in the leading indicators composite, December capital flows and manufacturing sales data. Restrain expectations for volatility.

New Zealand Dollar Traders Prepare for Upstream Inflation , Business Activity Figures

Interest rate expectations behind the New Zealand dollar have dropped off over the past month. This is consistent with RBNZ Governor Bollard’s dovish tone; but speculation surrounding the rate forecast will be exceptionally volatile going forward – and therefore so too will the kiwi dollar. The upcoming business activity indicator will be notable; but it is the upstream producer-level inflation readings for 4Q that will really weigh.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

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

ECONOMIC DATA

Next 24 Hours

Currency

GMT

Release

Survey

Previous

Comments

AUD

23:30

Westpac Leading Index (MoM) (DEC)

0.0%

Little changed in November as RBA raised rates.

JPY

23:50

Tertiary Industry Index (MoM) (DEC)

-0.6%

0.6%

Increased in the last 2 months.

AUD

0:00

DEWR Skilled Vacancies (MoM) (FEB)

-4.6%

Confidence fell in the last 8 months.

GBP

0:01

Nationwide Consumer Confidence (JAN)

50

53

Declined from 70 to 53 in the last year.

AUD

0:30

New Motor Vehicle Sales (MoM) (JAN)

0.8%

New motor vehicle sales increased in December for a fourth time in 5 months.

AUD

0:30

New Motor Vehicle Sales (YoY) (JAN)

-3.1%

EUR

7:00

EU 25 New Car Registrations (JAN)

-3.2%

Declined YoY in the last nine months.

GBP

9:30

Jobless Claims Change (JAN)

-4.0K

-4.1K

U.K. jobless claims likely declined in January for a fourth consecutive month as the country’s labor market improves.

GBP

9:30

Claimant Count Rate (JAN)

4.5%

4.5%

GBP

9:30

ILO Unemployment Rate (3M) (DEC)

7.9%

7.9%

GBP

9:30

Average Weekly Earnings inc Bonus (3MoY) (DEC)

2.0%

2.1%

GBP

9:30

Average Weekly Earnings ex Bonus (3MoY) (DEC)

2.3%

2.3%

EUR

10:00

Italian Current Account (euros) (DEC)

-5007M

Posted deficit in the last four months.

USD

12:00

MBA Mortgage Applications (FEB 11)

-5.5%

Fell last week as borrowing costs rose.

CAD

13:30

Leading Indicators (MoM) (JAN)

0.4%

0.5%

Increased in the last three months.

CAD

13:30

International Securities Transactions (Canadian dollar) (DEC)

9.000B

8.005B

Security purchases rose in November, led by a large increase in bonds.

CAD

13:30

Manufacturing Shipments (MoM) (DEC)

3.0%

-0.8%

Sales fell in two of the past 3 months.

USD

13:30

Housing Starts (JAN)

540K

529K

Housing starts were below 600K in each of the past three months.

USD

13:30

Housing Starts (MoM) (JAN)

2.1%

-4.3%

USD

13:30

Building Permits (JAN)

560K

627K

Building permits fell in December, led by a decline in multi-family homes.

USD

13:30

Building Permits (MoM) (JAN)

-10.7%

16.7%

USD

13:30

Producer Price Index (MoM) (JAN)

0.8%

0.9%

Wholesale costs in the U.S. increased more than projected in December, led by higher prices for commodities such as fuel and food.

USD

13:30

Producer Price Index (YoY) (JAN)

3.5%

4.0%

USD

13:30

Producer Price Index Ex Food & Energy (MoM) (JAN)

0.2%

0.2%

USD

13:30

Producer Price Index Ex Food & Energy (YoY) (JAN)

1.2%

1.3%

USD

14:15

Industrial Production (JAN)

0.5%

0.8%

Industrial production posted its largest gain last month since July.

USD

14:15

Capacity Utilization (JAN)

76.3%

76.0%

USD

15:30

DOE U.S. Crude Oil Inventories (FEB 11)

2000K

1898K

Crude oil refinery inputs averaged 14.3 million barrels per day during the week ending February 4, 42K barrels per day above the prior week’s average.

USD

15:30

DOE U.S. Gasoline Inventories (FEB 11)

1850K

4663K

USD

15:30

DOE U.S. Distillate Inventory (FEB 11)

-400K

288K

NZD

21:30

Business NZ Performance of Manufacturing Index (JAN)

53.1

Rose to a 6-month high in December.

NZD

21:45

Producer Prices- Inputs (QoQ) (4Q)

0.7%

Input prices rose in the last 4 quarters, while output prices rose in the last 3.

NZD

21:45

Producer Prices- Outputs (QoQ) (4Q)

1.2%

Currency

GMT

Upcoming Events & Speeches

EUR

8:15

ECB's Yves Mersch Speaks on European Economy

GBP

10:30

Bank of England Quarterly Inflation Report

USD

19:00

Federal Open Market Committee Meeting Minutes

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4025

1.6420

89.00

1.0000

1.0922

1.0600

0.8230

127.60

146.05

Resist 1

1.3875

1.6300

86.00

0.9775

1.0750

1.0200

0.8000

120.00

140.00

Spot

1.3488

1.6129

83.83

0.9667

0.9892

0.9962

0.7515

113.07

135.20

Support 1

1.3425

1.5750

80.00

0.9300

0.9800

0.9600

0.6850

103.80

125.00

Support 2

1.2900

1.5315

75.00

0.9000

0.9700

0.9375

0.6585

100.00

119.00

CLASSIC SUPPORT AND RESISTANCE EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.8500

1.6575

7.4525

7.8165

1.4945

Resist 2

7.7500

5.7800

6.2750

Resist 1

12.5000

1.6300

7.4025

7.8075

1.4655

Resist 1

7.5800

5.6625

6.1150

Spot

12.1417

1.5972

7.3331

7.7940

1.2803

Spot

6.4819

5.5276

5.8302

Support 1

11.7200

1.5300

7.1775

7.7490

1.2700

Support 1

6.2850

5.2625

5.7030

Support 2

11.4400

1.4725

6.9900

7.7450

1.2500

Support 2

6.1250

5.1000

5.5200

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.3589

1.6266

84.37

0.9762

0.9929

1.0095

0.7617

114.01

136.67

Resist 1

1.3539

1.6197

84.10

0.9715

0.9911

1.0028

0.7566

113.54

135.94

Pivot

1.3500

1.6103

83.65

0.9682

0.9881

0.9992

0.7536

112.93

134.72

Support 1

1.3450

1.6034

83.38

0.9635

0.9863

0.9925

0.7485

112.46

133.99

Support 2

1.3411

1.5940

82.93

0.9602

0.9833

0.9889

0.7455

111.85

132.77

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.3652

1.6296

84.72

0.9780

0.9984

1.0090

0.7614

114.47

136.81

Resist. 2

1.3611

1.6254

84.50

0.9752

0.9961

1.0058

0.7589

114.12

136.41

Resist. 1

1.3570

1.6212

84.27

0.9723

0.9938

1.0026

0.7564

113.77

136.01

Spot

1.3488

1.6129

83.83

0.9667

0.9892

0.9962

0.7515

113.07

135.20

Support 1

1.3406

1.6046

83.39

0.9611

0.9846

0.9898

0.7466

112.37

134.39

Support 2

1.3365

1.6004

83.16

0.9582

0.9823

0.9866

0.7441

112.02

133.99

Support 3

1.3324

1.5962

82.94

0.9554

0.9800

0.9834

0.7416

111.67

133.59

v

Written by: John Kicklighter, Currency Strategist for DailyFX.com

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

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