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FOREX: Dollar Traders Will Look to CPI Stats to Determine Whether Rate Expectations Should Rise

FOREX: Dollar Traders Will Look to CPI Stats to Determine Whether Rate Expectations Should Rise

2011-05-13 03:38:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar Traders Will Look to CPI Stats to Determine Whether Rate Expectations Should Rise
  • Euro Will be Reminded of the Growth Implications of Austerity Efforts
  • British Pound Slides as NIESR GDP Estimates and Factory Activity Feel the Bit of Budget Cuts
  • Australian Dollar: It isn’t Difficult to Tell the Influence of Risk Trends after the Labor Data Rout
  • Japanese Yen Hit by Bounce in Risk but Chinese and Japanese Reserve Ratios an Issue
  • Gold Recovers Lost Ground as the Dollar Gives Up Gains

Dollar Traders Will Look to CPI Stats to Determine Whether Rate Expectations Should Rise

Through much of Thursday’s trading session, the dollar was gaining ground; but a pickup in risk appetite through New York hours would prevent the currency from marking a securing critical progression on its bullish drive. A sense of hesitation is reasonable from a technical and fundamental perspective. Through price action alone, we note that EURUSD (the greenback’s most liquid counterpart) stalled at five-week support at 1.4150. Breaking this level would signal the next leg of a reversal that began last week. The fundamental considerations require a deeper understanding. When all else is the same (or in other words, when there is no active bullish or bearish bias behind the dollar and capital markets); the masses will defer to prevailing appetites. Considering the S&P 500 is just off multi-year lows and the euro has yet to suffer a serious reversal from its yield-driven rally; it isn’t difficult to discern where the mass’ predisposition lies. This is an important detail to recognize; because it suggests that following this dollar-bullish path requires active support.

Risk trends are the most immediate threat to volatility; but we may also see yield expectations generate significant waves for the greenback. This past trading session, Philadelphia Fed President Plosser offered a complimentary hawkish voice to Kocherlakota’s rhetoric the day before. The central banker projected 3 to 3.5 percent growth in 2011 and 2012 while also forecasting unemployment to hover around 7 to 7.5 percent by the end of 2012. What rate watchers were really interested in though were his suggestions that the Fed “must be prepared” to act “aggressively” and that he expects tightening in the “not-too-distant future”. It is important to realize that this is still a minority voice amongst policy officials; but it is starting to pick up steam. Potentially far more effective at stoking interest rate speculation is Friday’s CPI data for April. The consensus forecast of a 3.1 percent annual pace of inflation would push price pressures well outside the central bank’s comfort zone.

Related:Discuss the Dollar in the DailyFX Forum, John’s Picks: When will EURUSD Make Its Next Tradable Run Below 1.4150?

Euro Will be Reminded of the Growth Implications of Austerity Efforts

The euro’s future is in disarray. Yet, that doesn’t seem to dissuade the market from keeping the currency elevated in the face of ever-more prolific concerns. This is the hallmark of a speculative crowd. In contrast to investors who are willing to weather temporary drawdown in order to make returns over an extended period; the speculative traders are nimble and fickle. It would seem that a group that is willing to unwind and even flip their position at the drop of a hat would make the market far more sensitive to recent fundamental waves. Instead, it is their flexibility that allows them to overlook fundamental concerns that are constantly pushed back to take advantage of returns that can be made today. Yet, those problems will catch up to the market eventually. Further assuring that inevitability, the wires have been running comments from officials with directly contrasting vows for monetary policy. On one hand, we have German Chancellor Merkel saying Greece will not be offered further accommodation on its bailout program until it was clear the country was on track to trim its deficit; while Finland seems willing to support the Portugal bailout package only if the troubled country sells assets and it is given an explicit guarantee that it will it will be paid out first in the event of further strain. Alternatively, we have Irish officials demanding equivalent accommodation on its emergency loans should Greece be shown favor; and governments for all three ‘rescued’ nations seem ready to flaunt the restructure or withdrawal cards.

We will find some resolution (but perhaps not the kind that will encourage) after the Eurogroup meeting next Monday and Tuesday. In the meantime, we will see data that both touts the market’s confidence in the euro and reminds of the steep cost that is paid for austerity. The initial round of European 1Q GDP is due; and there is notable deviation in expectations for the region’s largest (and subsequently strongest) members and its most troubled participants. It’s fitting that German and French figures are due first with expectations of 0.9 and 0.6 percent expansion respectively. That’s a significant contrast to the 0.3 percent contraction expected for Portugal and the unsettled forecast for Greece. How will this data impact the euro? If the core EU members show robust growth, rate expectations will remain elevated and the crowd will be more resilient to disappointing figures from the periphery. Alternatively, a cooler pace of expansion at the top will be seen as an open door to financial fears.

British Pound Slides as NIESR GDP Estimates and Factory Activity Feel the Bit of Budget Cuts

Interest rate expectations for the British pound are hovering at anemic levels. With only 39 basis points worth of hikes priced in over the coming 12 months, one of the sterling’s most appealing traits has essentially vanished. So, unlike the euro which is able to compensate for its financial troubles with a competitive (and still rising) yield, the pound is simply left to its fundamental troubles. We were reminded what austerity can do this past session when the NIESR GDP estimate for April slowed to 0.3 percent expansion and industrial production posted a similarly weak rise.

Australian Dollar: It isn’t Difficult to Tell the Influence of Risk Trends after the Labor Data Rout

At the onset of Thursday’s trading session, the Australian dollar was under tremendous pressure after the April employment report printed a net 22,100-person drop in payrolls. Such a remarkable upset would normally keep the market under pressure; but we are reminded of the fact that there are greater concerns at the moment. The Aussie currency would regain much of its losses through the day as risk appetite bounced back.

Japanese Yen Hit by Bounce in Risk but Chinese and Japanese Reserve Ratios an Issue

Much like the Australian dollar, the Japanese yen is the product of its carry positioning. When risk trends are quiet, traditional fundamentals may bleed in. Otherwise, the funding currency will be jostled by capital flows. So, news that China was raising its banks’ reserve requirements and the Bank of Japan was increase its legal reserves would matter little when European and US capital markets began their climb.

Gold Follows Up on Monday’s Sharp Correction, What would it take to Trigger a Reversal?

Ever the physical counterpart to the US dollar, gold would post a dramatic recovery from early losses posted Thursday morning. Metals traders will continue to follow the greenback’s path through the final trading day; but there will also be a unique interest in the European and US data. As an inflation hedge (especially when the Fed is holding off from policy), the CPI numbers will be particularly important.

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

GMT

Currency

Release

Survey

Previous

Comments

3:00

NZD

Non Resident Bond Holdings (APR)

62.8%

May increase as yields still attractive

5:30

EUR

French Gross Domestic Product (YoY) (1Q)

1.8%

1.5%

First two candidates in today’s Eurozone GDP reports show higher growth, led by investments and manufacturing

5:30

EUR

French Gross Domestic Product (QoQ) (1Q)

0.6%

0.4%

6:00

EUR

German GDP n.s.a. (YoY) (1Q)

4.5%

4.0%

6:00

EUR

German GDP s.a. (QoQ) (1Q)

0.9%

0.4%

6:00

EUR

German GDP w.d.a. (YoY) (1Q)

4.2%

4.0%

6:45

EUR

French Non-Farm Payrolls (QoQ) (1Q)

0.3%

0.2%

French employment numbers expected to show recovering economy

6:45

EUR

French Wages (QoQ)(1Q)

0.6%

0.3%

7:15

CHF

Producer & Import Prices (MoM) (APR)

0.4%

Prices may disappoint following in weaker CPI reported earlier this week

7:15

CHF

Producer & Import Prices (YoY) (APR)

0.5%

0.4%

8:00

EUR

Italian GDP s.a. and w.d.a. (QoQ) (1Q)

0.3%

0.1%

Better EU GDP data may drive Euro confidence higher, risk sentiment lower, even with troubles of periphery countries

8:00

EUR

Italian GDP s.a. and w.d.a. (YoY) (1Q)

1.3%

1.5%

9:00

EUR

Euro-Zone GDP s.a. (QoQ) (1Q)

0.6%

0.3%

9:00

EUR

Euro-Zone GDP s.a. (YoY) (1Q)

2.2%

2.0%

12:30

USD

Consumer Price Index (MoM) (APR)

0.4%

0.5%

Lower expected CPI may contribute to longer sustained low US rates, dollar weakness

12:30

USD

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

224.715

223.467

12:30

USD

Consumer Price Index (YoY) (APR)

3.1%

2.7%

12:30

USD

CPI Ex Food & Energy (MoM) (APR)

0.2%

0.1%

12:30

USD

CPI Ex Food & Energy (YoY) (APR)

1.3%

1.2%

12:30

USD

CPI Core Index s.a. (APR)

223.331

13:55

USD

U. of Michigan Confidence (MAY)

70

69.8

Small margin gain indicates slow recovery

GMT

Currency

Upcoming Events & Speeches

2:00

CNY

Conference Board China March Leading Economic Index

14:00

USD

Annual Revisions: Durable Goods

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

1.5160

1.6750

89.00

0.9345

1.0275

1.1800

0.8400

127.60

146.05

Resist 1

1.5000

1.6600

86.00

0.8900

1.0000

1.1000

0.8215

125.90

140.00

Spot

1.4235

1.6284

80.89

0.8849

0.9628

1.0657

0.7953

115.14

131.71

Support 1

1.4000

1.6200

80.00

0.8600

0.9500

1.0400

0.7825

115.00

125.00

Support 2

1.3700

1.5750

75.00

0.8500

0.9055

1.0200

0.6850

105.50

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

7.4025

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

12.5000

1.6300

7.3500

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

11.6389

1.5776

6.9177

7.7721

1.2392

Spot

6.2987

5.2381

5.5088

Support 1

11.5200

1.5040

6.5575

7.7490

1.2145

Support 1

6.0800

5.1050

5.3040

Support 2

11.4400

1.4725

6.4295

7.7450

1.2000

Support 2

5.8085

4.9115

4.9410

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

1.4365

1.6445

81.61

0.8938

0.9736

1.0793

0.8079

116.43

133.99

Resist 1

1.4300

1.6364

81.25

0.8893

0.9682

1.0725

0.8016

115.78

132.85

Pivot

1.4212

1.6300

80.98

0.8860

0.9641

1.0646

0.7929

114.99

132.04

Support 1

1.4147

1.6219

80.62

0.8815

0.9587

1.0578

0.7866

114.34

130.91

Support 2

1.4059

1.6155

80.35

0.8782

0.9546

1.0499

0.7779

113.55

130.10

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

1.4425

1.6450

81.82

0.8961

0.9727

1.0806

0.8065

117.03

133.84

Resist. 2

1.4377

1.6408

81.59

0.8933

0.9702

1.0768

0.8037

116.56

133.31

Resist. 1

1.4330

1.6367

81.35

0.8905

0.9677

1.0731

0.8009

116.09

132.78

Spot

1.4235

1.6284

80.89

0.8849

0.9628

1.0657

0.7953

115.14

131.71

Support 1

1.4140

1.6201

80.43

0.8793

0.9579

1.0583

0.7897

114.19

130.65

Support 2

1.4093

1.6160

80.19

0.8765

0.9554

1.0546

0.7869

113.72

130.11

Support 3

1.4045

1.6118

79.96

0.8737

0.9529

1.0508

0.7841

113.25

129.58

v

Written by: John Kicklighter, Senior 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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