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Dollar: How will the Greenback React to the Fed Decision?

Dollar: How will the Greenback React to the Fed Decision?

2011-09-21 03:41:00
John Kicklighter, Chief Currency Strategist
Share:
  • Dollar: How will the Greenback React to the Fed Decision?
  • Euro Takes a Fundamental Hammering but Price Still Holding
  • British Pound Traders Look to BoE Minutes for Rate Outlook
  • Swiss Franc Dives on Speculation SNB Moving EURCHF Floor to 1.25
  • Japanese Yen Sees Volatility Explode in Asian Session – Intervention?
  • Australian Dollar Traders Refuse to Absorb RBA’s Rate Commentary
  • Gold Ready for a Breakout, Technically and Fundamentally

Dollar: How will the Greenback React to the Fed Decision?

We have finally come to the pivotal Federal Open Market Committee (FOMC) rate decision. Many traders will be looking at this particular event only for its immediate market-moving implications; but those that look too closely will miss the bigger picture of what this announcement could mean for the dollar and broader capital markets beyond the volatility impact. To understand what kind of influence this policy decision can carry; we need to first understand where the markets are now. More than just the past few days, risk appetite trends have found a meaningful floor that seems to defy the developments we have seen in growth forecasts, the interest rate outlook and financial market functioning. What can stall a pair like EURUSD from extended its tumble while the Euro-area crisis seems to move further and further beyond the point of no return? US stimulus. Similar to the way the market treats the announcement of Chinese investment in a company or country, ECB government bond purchases or the SNB placing a floor underneath EURCHF; some investors still think that a Fed bailout is a cure all – or at least a rally point.

Where does this believe come from? When we look back to the reaction capital market’s reaction to the first round of stimulus (TARP, TALF, etc) and its second iteration (QE2); we saw a clear, positive reaction from financial assets. The economic implications of this support was a little more complicated; but the possibility that it was helping the economy find a firmer footing was readily backed the reality that the central bank was essentially lifting asset prices to the benefit of traders was undeniable. And so, we come to the announcement after a special two-day meeting in which officials have said they would be discussing options to further support the economy and markets. There are three general scenarios in how this event could reasonable fall: the Fed exceeds, meets or falls short of expectations.

For scenarios, the least likely outcome (but therefore also the most market-moving) would be for the central bank to do nothing – no additional purchases and no balance sheet restructuring. This would offer relief for dollar traders that the central bank is actively devaluing the dollar and would more importantly open the door to the risk aversion that has clearly built up just below the surface (thereby feeding the risk aversion appeal of the greenback). Slightly further up the probability scale is the scenario where the Fed announces an outright purchases program akin to the previous $600 billion Treasury purchase (essentially a QE3). This is unlikely because the positive effects of QE2 are hard to measure in growth or markets. The most likely approach is what pundits are calling ‘Operation Twist’. This is changing the holdings on the balance sheet by selling shorter-term securities and swapping them out for longer-dated assets. This can have many variations to it; so it is therefore far from an easy-read scenario. And, ultimately, it would do little to boost speculative interests. So risk trends could still falter after a careless rally.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:The Fed Decision, Euro Crisis and Rate Outlook Scenarios for EURUSD

Euro Takes a Fundamental Hammering but Price Still Holding

One of the greatest risks should the market be disappointed with the global implications of the Fed rate decision is that there will be no ‘risk on’ distraction to draw the attention away from Europe’s burgeoning crisis. A little late to the game, Fitch said that it was likely that Greece would default; but it would not leave the Euro Zone. This is the most imminent and pervasive threat to region because it is difficult to determine its full effect on the currency and union. However, we should also watch the spread to the core in the wake of Italy’s downgrade by Standard & Poor’s. Another facet of the currency’s troubles: the possibility of an interest rate cut. The market is currently pricing in a 25bp cut at the next meeting.

British Pound: Will the BoE Finally be Proactive with Building Trouble?

Speaking of interest rate expectations, the Bank of England is hanging in purgatory; but we are seeing greater scope for the policy authority to finally capitulate and follow its global brethren. With the UK economy slowing alongside its major trade partners, we will see the negative impact that austerity can leverage. Will the central bank be sensitive to this fact and politicians calls for further stimulus to ease the fiscal clampdown? The minutes are the next read we will have on their view; and after their Quarterly Bulletin, it seems they are warming up to action.

Swiss Franc Dives on Speculation SNB Moving EURCHF Floor to 1.25

Speculation was running in second gear Tuesday with the market circulating the rumor that the SNB was looking to boost its floor on EURCHF from 1.20 to 1.25. They have not confirmed this; but from a strategic perspective, it is reasonable. If the central bank left the pair to its own devices, it would likely hold to 1.20 as long as the Euro crisis prevailed (a long time). So active encouragement could be a helpful step.

Japanese Yen Sees Volatility Explode in Asian Session – Intervention?

Did the Japanese central bank or government intervene in the FX market this morning? Through the early Asian session hours, USDJPY was building speed as it dropped below 76.35 when a sudden 55-point surge occurred. These are certainly thin markets; so sharp moves are possible; but this is most likely intervention of some sort. That said, it didn’t have lasting effect aside from killing momentum in the decline.

Australian Dollar Traders Refuse to Absorb RBA’s Rate Commentary

In the RBA’s minutes, the policy authority suggested it was “well placed” to responds to building global risks; but most remarkably, they suggested that current expectations for aggressive cuts were not likely accurate. Signals to the market don’t come any clearer than that. And yet, the market is still pricing in approximately 140 basis points of cuts over 12 months and a 60 percent probability of a 25 bps cut in October.

Gold Ready for a Breakout, Technically and Fundamentally

Gold reversed its unfavorable fortunes at the start of the week with Tuesday’s rally. However, this advance doesn’t bring us to any new trends. Realistically, it is volatility within congestion and uncertainty. We are coming to the conflict of US stimulus holdout versus European crisis; and technicals are showing the same indecision. A breakout over the next 24 hours is highly likely.

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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

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Westpac Leading Index (MoM) (JUL)

0.1%

Index may return to negative on outlook

1:00

AUD

Consumer Inflation Expectation (SEP)

2.7%

Despite inflation, RBA remains dovish

1:00

AUD

DEWR Internet Skilled Vacancies (MoM) (AUG)

-0.8%

Skilled vacancies may fall on economy

2:00

CNY

Conf Board China Leading Economic Index (JUL)

158.9

Leading index has been fluctuating

3:00

NZD

Credit Card Spending s.a. (MoM) (AUG)

1.0%

Credit card spending can be used as a gauge of retail sales

3:00

NZD

Credit Card Spending (YoY) (AUG)

7.3%

4:30

JPY

All Industry Activity Index (MoM) (AUG)

0.5%

2.3%

Japanese industries may slow again

7:00

CHF

Money Supply M3 (YoY) (AUG)

5.9%

Will not include intervention change

8:30

GBP

Bank of England Minutes

With 2 hawkish members withdrawing their dissent, minutes may reveal a board shifting towards additional easing

8:30

GBP

Public Finances (PSNCR) (Pounds) (AUG)

6.0B

-5.6B

Government finances expected to improve, led by borrowing and against expectations

8:30

GBP

PSNB ex Interventions (AUG)

13.0B

0.0B

8:30

GBP

Public Sector Net Borrowing (Pounds) (AUG)

11.4B

-2.0B

11:00

CAD

Consumer Price Index (AUG)

120

Canadian prices expected stable; Bank of Canada focuses on core prices. Same rate of growth may delay an eventual rate hike, though BoC eager to start raising rates

11:00

CAD

Consumer Price Index (MoM) (AUG)

0.1%

0.2%

11:00

CAD

Consumer Price Index (YoY) (AUG)

2.9%

2.7%

11:00

CAD

Bank Canada CPI Core (MoM) (AUG)

0.2%

0.2%

11:00

CAD

Bank Canada CPI Core (YoY) (AUG)

1.6%

1.6%

11:00

USD

MBA Mortgage Applications (SEP 16)

6.3%

Mortgage applications and new sales may show some improvement in housing market, though recovery unclear

14:00

USD

Existing Home Sales (AUG)

4.75M

4.67M

14:00

USD

Existing Home Sales (MoM) (AUG)

-3.50%

14:30

USD

DOE U.S. Crude Oil Inventories (SEP 16)

-6704K

Negative crude inventories indicate heavy demand, may lead a short term bounce

14:30

USD

DOE Cushing OK Crude Inventory (SEP 16)

-460K

14:30

USD

DOE U.S. Distillate Inventory (SEP 16)

1711K

14:30

USD

DOE U.S. Gasoline Inventories (SEP 16)

1940K

18:15

USD

Federal Open Market Committee Rate Decision

0.25%

0.25%

Trades will be heavily watching this data point as the Fed reported they will be discussing a possibility of additional stimulus at this meeting.

22:45

NZD

Gross Domestic Product (QoQ) (Q2)

0.5%

0.8%

New Zealand productivity expected to grow on a year-to-year basis, though leading data uncertain on Australian, Chinese slowdown

22:45

NZD

Gross Domestic Product (YoY) (Q2)

1.7%

1.4%

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

1.4500

1.6745

86.00

0.9050

1.0275

1.0750

0.9020

113.50

146.05

Resist 1

1.4000

1.6600

81.50

0.8840

1.0000

1.0800

0.8750

110.00

140.00

Spot

1.3676

1.5725

76.41

0.8893

0.9927

1.0254

0.8231

104.51

120.16

Support 1

1.3500

1.5700

76.35

0.7800

0.9425

1.0200

0.7745

104.00

121.00

Support 2

1.2900

1.5350

75.50

0.7500

0.9055

0.9925

0.6850

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

1.8235

8.5800

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

13.2500

1.8000

8.1025

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.2230

1.7846

7.7216

7.7910

1.2609

Spot

6.6302

5.4456

5.6444

Support 1

12.6000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

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

1.3823

1.5792

76.91

0.9000

0.9986

1.0403

0.8322

105.75

120.98

Resist 1

1.3749

1.5758

76.66

0.8946

0.9956

1.0328

0.8277

105.13

120.57

Pivot

1.3672

1.5707

76.51

0.8869

0.9920

1.0239

0.8220

104.56

120.18

Support 1

1.3598

1.5673

76.26

0.8815

0.9890

1.0164

0.8175

103.94

119.76

Support 2

1.3521

1.5622

76.11

0.8738

0.9854

1.0075

0.8118

103.37

119.37

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

1.3904

1.5920

77.30

0.9048

1.0040

1.0431

0.8379

106.46

122.11

Resist. 2

1.3847

1.5871

77.08

0.9009

1.0012

1.0387

0.8342

105.97

121.62

Resist. 1

1.3790

1.5822

76.86

0.8970

0.9984

1.0342

0.8305

105.48

121.13

Spot

1.3676

1.5725

76.41

0.8893

0.9927

1.0254

0.8231

104.51

120.16

Support 1

1.3562

1.5628

75.96

0.8816

0.9870

1.0166

0.8157

103.54

119.18

Support 2

1.3505

1.5579

75.74

0.8777

0.9842

1.0121

0.8120

103.05

118.70

Support 3

1.3448

1.5530

75.52

0.8738

0.9814

1.0077

0.8083

102.56

118.21

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

Follow John on twitter at http://www.twitter.com/JohnKicklighter

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

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