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Forex: Dollar Disappointed by a Restrained FOMC Minutes but the Hawkish Turn is Just on the Horizon

Forex: Dollar Disappointed by a Restrained FOMC Minutes but the Hawkish Turn is Just on the Horizon

2011-02-17 07:15:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Disappointed by a Restrained FOMC Minutes but the Hawkish Turn is Just on the Horizon
  • British Pound Reverses its Gains after the BoE Quarterly Report Reinforces Neutral Stance
  • Euro Buys Time as Portugal Sells Debt, ECB Sterilizes Debt Purchases, Traders Await EU Summit
  • Swiss Franc Suffers Unexpected Volatility between Government and SNB Commentary
  • Japanese Yen Tumble Overdue but Perhaps too Fast for Fundamental Developments
  • Canadian Dollar Steady after Unconvincing Event Risk Does Little to Alter Rate Outlook

Dollar Disappointed by a Restrained FOMC Minutes but the Hawkish Turn is Just on the Horizon

From a purely technical perspective, the dollar has hovered on the verge of a meaningful bullish breakout since the week began. However, potential is just that until there is a catalyst that converts a scenario into progress and further feeds the move with fundamental support. The disconnect for the dollar’s recovery is a lack of tangible spark that plays to one of the benchmark currency’s primary drivers: risk appetite trends; a favorable yield outlook or relative growth potential. We had a chance to play to rate expectations and perhaps investor sentiment with Wednesday’s FOMC minutes; but the long-shot (and high-risk) outcome for that inevitable step towards a hawkish tone would follow the odds and leave the dollar once again wanting for its trigger. For the market, this failed opportunity led the Dollar Index to its largest decline in a week and a serious threat to the nascent recovery the currency has attempted to stage in February. Without a clear reason to bid the dollar, it will be difficult to drive EURUSD below 1.3500, AUDUSD below 0.9900 and GBPUSD below 1.6000.

Through the first half of the week, the fundamental coffers were filled with both intrinsic and exogenous event risk. Yet, the collective influence of this dense and volatile mix over the dollar was inherently low from the very beginning. For the scheduled data, the 15 percent surge in housing starts through January was offset by the fact that single family starts (which are a better measure of consumer health and wealth) actually fell 1.0 percent. In a market without speculation, this piece of data would have to be priced in. But in reality, speculation is so solid for the underlying outlook for slow but steady growth that this specific update does little to alter the crowd’s bias. The same can be said about the Producer Price Index for the same month. Upstream inflation pressures are high at a 3.6 percent annual pace; but this was also a reduction from the previous month. For the market, though, there is a very modest chance that this indicator will materially alter the Fed’s time frame for rate hikes.

On the other hand, speculation surrounding the interest rate outlook will inevitably start to factor into the dollar’s future. In fact, there is a relatively clear time frame for the gradual, hawkish shift; and it is only a matter of time before speculators start to front-run the change. Wednesday, the minutes from the Federal Reserve’s late-January rate decision could have initiated the early hawkish call. In the appraisal, the central bank raised its 2011 GDP forecast from a range of 3.0 - 3.6 percent up to 3.4 - 3.9 percent. Over the same period, the group raised its inflation forecast (via the PCE reading) from a 1.1 - 1.7 percent annual clip up to a 1.3 - 1.7 percent gait. This is an encouraging forecast and suggests monetary policy will be reined in the foreseeable future. However, the market was looking for something more definitive – perhaps the framework for the eventual unwinding of stimulus programs (liquidity withdrawal will likely precede a return to rate hikes). There was little guidance as to the timing of this change; but favorable economic readings may be all that is needed. With a natural June expiration for QE2, there is a clear schedule for market participants to follow. And, as we learned with the speculative run months prior to the implementation of the $600 newest billion stimulus program in November, traders will start to adjust to this development well before it actually happens.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: USDJPY Offers a Good Offset to EURUSD, AUDUSD Setups

British Pound Reverses its Gains after the BoE Quarterly Report Reinforces Neutral Stance

It was back to back fundamental volatility for the British pound through Wednesday’s session. Unfortunately, the two rounds of data would clash and leverage volatility for the currency without providing clear direction. After the previous day’s pressing January CPI report (a 4.0 percent annual clip is one percentage point above the tolerance band); rate speculators were increasingly confident that the BoE would have to finally cave to the persistence of price pressures and permit a more hawkish tone in its Quarterly Inflation report. Instead, the policy authority lowered its growth outlook over the coming two years because of austerity efforts and maintained that inflation would ease back to 2.0 percent by the middle of next year. Add in an unexpected 2,400-person rise in unemployment; and a hike is a difficult thing to justify in the next few months.

Euro Buys Time as Portugal Sells Debt, ECB Sterilizes Debt Purchases, Traders Await EU Summit

There was little in the way of scheduled event risk form the European region; and that fact actually helps the euro. With officials allowing German bank WestLB AG more time to set up a restructuring plan (kicking a clear problem down the road), Portugal selling off its 1 billion euros in 12-month bills (at a higher rate) and the ECB sterilizing 76.5 billion euros in government bond purchases after three weeks without a purchase (next week’s reading will report an increase); officials can claim things are materially improving. In reality, the meaningful decisions have just been pushed back. Strained financial conditions, disagreements on a fix and the potential for senior bond losses loom.

Swiss Franc Suffers Unexpected Volatility between Government and SNB Commentary

There were two, independent bouts of volatility for the franc Wednesday. On a positive note, the Swiss government suggested it had measures to deal with a strong currency – though this essentially translated into ‘living with’ an unfavorable exchange rate. And SNB President Hildebrand turn the tables when he said there are benefits to a strong currency and that expansive monetary policy cannot be maintained forever.

Japanese Yen Tumble Overdue but Perhaps too Fast for Fundamental Developments

A meaningful pullback from the Japanese yen has been long overdue considering the currency was so close to multi-year highs against many of its counterparts. However, in the two to three week tumble from the yen has been somewhat excessive when the broader market is more or less stable and Japanese JGB 10-year yields have actually advanced. A short-term correction is a probable scenario in the near future.

Canadian Dollar Steady after Unconvincing Event Risk Does Little to Alter Rate Outlook

The Canadian dollar is a currency that follows risk appetite lines as a commodity bloc member against most counterparts and economic counterpart to the US dollar. That said, growth and interest rate expectations are important but currently flat. A weaker than expected Leading Indicators index and modest increase in capital flows hardly alters the long-term outlook. Perhaps the BoC’s quarterly review will stir the pot.

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**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

JPY

23:50

Japan Buying Foreign Bonds (Yen) (FEB 11)

388.0B

Japanese investors were net buyers of foreign bonds during the week ended February 4, while net sellers over overseas stocks and short term securities.

JPY

23:50

Japan Buying Foreign Stocks (Yen) (FEB 11)

-8.0B

JPY

23:50

Foreign Buying Japan Bonds (Yen) (FEB 11)

224.2B

JPY

23:50

Foreign Buying Japan Stocks (Yen) (FEB 11)

197.6B

CNY

2:00

Actual Foreign Direct Investment (YoY) (JAN)

17.2%

15.6%

FDI likely rose for an 18th month.

NZD

2:00

ANZ Consumer Confidence Index (FEB)

117.1

New Zealand consumer confidence is at it s highest level since June.

NZD

2:00

ANZ Consumer Confidence (MoM) (FEB)

4.4%

JPY

5:00

Leading Index (DEC F)

101.4

Japanese leading index rose to an eight-month high in December.

JPY

5:00

Coincident Index (DEC F)

103.1

EUR

9:00

Euro-Zone Current Account s.a. (euros) (DEC)

-11.2B

Euro-Zone posted a current account deficit in the past ten months.

EUR

9:00

Euro-Zone Current Account n.s.a. (euros) (DEC)

-6.0B

EUR

10:00

Euro-Zone Construction Output s.a. (MoM) (DEC)

-0.9%

Construction output fell in November for a third time in four months.

EUR

10:00

Euro-Zone Construction Output w.d.a. (YoY) (DEC)

-6.8%

CHF

10:00

ZEW Survey (Expectations) (FEB)

-18.4

Negative reading in the past 5 months.

GBP

11:00

CBI Trends Total Orders (FEB)

-9

-16

Fell from a 2-year high in December.

CAD

13:30

Wholesale Sales (MoM) (DEC)

0.9%

1.2%

Sales rose in the last four months.

USD

13:30

Consumer Price Index (MoM) (JAN)

0.3%

0.4%

Consumer prices in the U.S. climbed more than forecast in December, led by higher fuel and food prices, while other goods and services showed the smallest annual increase on record.

USD

13:30

Consumer Price Index (YoY) (JAN)

1.6%

1.5%

USD

13:30

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

0.1%

0.1%

USD

13:30

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

0.9%

0.8%

USD

13:30

Consumer Price Index Core Index s.a. (JAN)

222.210

USD

13:30

Consumer Price Index n.s.a. (JAN)

220.176

219.179

USD

13:30

Initial Jobless Claims (FEB 12)

400K

383K

Initial jobless claims fell below 400K last week for the first time this year.

USD

13:30

Continuing Claims (FEB 5)

3895K

3888K

EUR

15:00

Euro-Zone Consumer Confidence (FEB A)

-11.0

-11.2

Confidence holds near a 3-year high.

USD

15:00

Leading Indicators (JAN)

0.3%

1.0%

Indicators likely rose for a 7th month.

USD

15:00

Philadelphia Fed. (FEB)

21.0

19.3

Fell from a 7-month high in December.

USD

21:00

RPX Composite 28 Day (YoY) (DEC)

-2.18%

RPX composite fell YoY in December to a ten-month low.

USD

21:00

RPX Composite 28 Day Index (DEC 31)

189.44

Currency

GMT

Upcoming Events & Speeches

USD

15:00

Fed's Bernanke, FDIC's Bair, SEC's Schapiro Testify on Dodd-Frank

CAD

15:30

Bank of Canada Publishes Quarter Review

USD

17:00

Fed's Dennis Lockhart Speaks on Ireland, U.S. Economy

USD

17:30

Fed's Chrles Evans Speaks on U.S. Economy

USD

18:10

Fed's Richard Fisher Speaks on Monetary Policy, U.S. Economy

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

1.3558

1.6091

83.60

0.9596

0.9855

1.0036

0.7553

113.34

134.51

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

12.0679

1.5842

7.2550

7.7895

1.2789

Spot

6.4310

5.4994

5.7403

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

1.3661

1.6287

84.17

0.9815

0.9925

1.0113

0.7601

114.03

136.01

Resist 1

1.3610

1.6189

83.89

0.9705

0.9890

1.0075

0.7577

113.68

135.26

Pivot

1.3536

1.6088

83.69

0.9630

0.9870

1.0017

0.7542

113.30

134.72

Support 1

1.3485

1.5990

83.41

0.9520

0.9835

0.9979

0.7518

112.95

133.97

Support 2

1.3411

1.5889

83.21

0.9445

0.9815

0.9921

0.7483

112.57

133.43

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

1.3718

1.6252

84.46

0.9705

0.9945

1.0162

0.7651

114.72

136.11

Resist. 2

1.3678

1.6212

84.24

0.9678

0.9923

1.0130

0.7626

114.38

135.71

Resist. 1

1.3638

1.6172

84.03

0.9650

0.9900

1.0099

0.7602

114.03

135.31

Spot

1.3558

1.6091

83.60

0.9596

0.9855

1.0036

0.7553

113.34

134.51

Support 1

1.3478

1.6010

83.17

0.9542

0.9810

0.9973

0.7504

112.65

133.71

Support 2

1.3438

1.5970

82.96

0.9514

0.9787

0.9942

0.7480

112.30

133.31

Support 3

1.3398

1.5930

82.74

0.9487

0.9765

0.9910

0.7455

111.96

132.91

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

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

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