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Dollar: The Fed Decision will be a Litmus Test for QE3 Speculation

Dollar: The Fed Decision will be a Litmus Test for QE3 Speculation

2012-01-25 03:00:00
John Kicklighter, Chief Strategist
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  • Dollar: The Fed Decision will be a Litmus Test for QE3 Speculation
  • British Pound Meets Event Risk for its Two Primary Concerns: Stimulus and Recession
  • New Zealand Dollar Traders Will See Whether the RBNZ Will Yield to CPI
  • Euro Traders Continue to Ease Off on Crisis Positioning, But Risk Can Change That
  • Australian Dollar: Core Inflation Firms while Headline Slips, Which Matters?
  • Japanese Yen Marks a Sharp Decline, MoF Confirms its First Deficit in Three Decades
  • Gold Closes Out Only its Fifth Bearish Close this Year as Volume Shrinks

Dollar: The Fed Decision will be a Litmus Test for QE3 Speculation

There has been a notable downshift in the moderate - but persistent - risk appetite and Euro recovery trends that have defined the broader tendencies of the market over the past weeks. This is hardly the restraint of a steady market, rather it is the ominous retrenchment before a heavy round of serious event risk. There are a range of meaningful events / indicators that we should monitor for their isolated impact on their respective currencies, but there is also a heady risk from particular standouts that can potentially catalyze a latent drift in risk into a clear and driving trend in underlying sentiment. As the dollar happens to play the role of safe-haven-of-last resort, its position on any clear sentiment bearings should be relatively clear. Should we see a consensus of ‘risk on’, the EURUSD’s tentative bear trend reversal will easily clear its 1.3075 overhead, while the already buoyant risk-sensitive pairs (AUDUSD, NZDUSD and USDCAD) will charge new anti-dollar highs. Alternatively, a consensus of false optimism and a dim outlook will render the greenback an attractive buy at a recently discounted price.

In a day of many significant economic releases, the top concern is the Federal Open Market Committee’s (FOMC) rate decision. Normally, we would write this event off as a non-starter, but this is not our regular policy gathering. While the central bank will certainly leave the benchmark unchanged, we are going to get an unprecedented look at the policy authority’s policy outlook. New this meeting, the Fed will offer a forecast for interest rate expectations. This is certainly valuable, yet we have already had the call for rates to be held steady until the middle of 2013 burned into the back of our brains. What truly matters is the regular statement and Bernanke’s press conference. In this event, we have the opportunity to determine the possibility of and time frame for a further large-scale stimulus program (QE3).

Though we haven’t seen the central bank push forward the agenda of expanding its balance sheet further, speculation (perhaps hope) has led the market to price a significant possibility of such an outcome by approximately the second quarter of this year. Despite the warnings of an economic slowdown for global economy (the IMF added its voice to that call), the drop in earnings and the deterioration of the European financial situation, we have seen the S&P 500 and other risk-sensitive assets rise over the past weeks. This could very well be a reflection of stimulus expectations. If indeed QE3 is heavily priced into these markets and has artificially propped up asset prices, the absence of tangible confirmation could spell a serious fault in risk positioning and a tremendous spark for a dollar reversal. If it is confirmed, the dollar will suffer across the board.

British Pound Meets Event Risk for its Two Primary Concerns: Stimulus and Recession

While the UK data won’t pull at the underlying elemental fundamental strings of the global financial markets like the FOMC has the potential to, it can nevertheless significantly alter the strength and bearing of the sterling. We have two distinct events that speak to two different aspects of the pound’s health: growth and financial support. Set for simultaneous release, the Bank of England meeting minutes and advanced 4Q GDP figure each hold the potential for tremendous volatility. The growth figures are the easiest to interpret. The consensus is for a 0.1 percent contraction in the economy through the final months of 2011 which would confirm the fears of various policy officials and third party economy watchers that the UK is tipping into recession while the taint of financial crisis is spreading from the Euro Zone. The market has no doubt adjusted for a disappointing outcome, but given the seven day advance from the cable, it wouldn’t likely take much of a bearish surprise to encourage a correction. It is the minutes that carry the greater nuance. There is a growing belief that the central bank is prepared to follow up on expanding its bond purchasing program. Traders will be looking for confirmation in this statement. Risk of stimulus and recession and yet sterling is up…

New Zealand Dollar Traders Will See Whether the RBNZ Will Yield to CPI

The kiwi dollar is often held up to comparison to its Australian counterpart. And, it is in this comparison that the currency has found a bullish advantage. Where the RBA has started on a regime of rate cuts, the RBNZ has held firm in its neutral to hawkish lean. However, just this past week, we saw inflation New Zealand inflation pressures drop sharply. Has this set in motion a change in policy bearing? The RBNZ will tell us.

Euro Traders Continue to Ease Off on Crisis Positioning, But Risk Can Change That

The bigger fundamental concerns persist. Following up on the World Bank and EU’s own projections, the IMF has offered its own projection of recession for the Euro Zone economy (a 0.5 percent contraction in 2012). Furthermore, rating agencies are reiterating the reality that Greece is technically heading towards default. And yet, government bonds and the euro are rising. Is this a benefactor of stimulus hope?

Australian Dollar: Core Inflation Firms while Headline Slips, Which Matters?

There was some confusion with the release of the Australian CPI data and the market’s reaction. When significant data that has various components is released, the masses focus in on the headline figures first typically. That said, the headline 4Q CPI figure eased slightly. However, the core figure would firm. I would argue that neither will really change the RBA’s policy bearing and therefore sets a lasting tone.

Japanese Yen Marks a Sharp Decline, MoF Confirms its First Deficit in Three Decades

Perhaps the biggest move through Tuesday’s session was the tumble form the Japanese yen. It is tempting to saddle this with the easy label of manipulation and move on, but that would put us on the wrong path. We have seen the BoJ lower its growth forecast and the IMF while the Ministry of Finance confirmed its first annual deficit in 31 years. This is a serious issue for a trade economy. For the upcoming session, USDJPY watchers should look at the QE3 interest surrounding the Fed decision. If it doesn’t pan out, it could prove a long overdue bullish driver.

Gold Closes Out Only its Fifth Bearish Close this Year as Volume Shrinks

Though it curbs the consistent climb at an important technical boundary, gold’s bearish close was only the fifth since the year began. What is interesting is the conviction in the move. Tuesday’s futures volume was the weakest this year and points to another divergence. The precious metal will be heavily vested in the dollar’s reaction to QE3 speculation in the upcoming session.

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

0:00

AUD

DEWR Internet Skilled Vacancies (MoM) (DEC)

-1.0%

Employment growth stable

0:30

AUD

CPI (QoQ) (4Q)

0.2%

0.6%

Australian inflation widely expected to slow again, following weaker 4Q PPI. Gives additional scope of rate cuts

0:30

AUD

CPI (YoY) (4Q)

3.3%

3.5%

0:30

AUD

CPI RBA Trimmed Mean (QoQ) (4Q)

0.5%

0.3%

0:30

AUD

CPI RBA Trimmed Mean (YoY) (4Q)

2.4%

2.3%

2:00

NZD

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

-3.4%

Indicator of retail spending showing still robust consumption

2:00

NZD

Credit Card Spending (YoY) (DEC)

3.2%

9:00

EUR

German IFO - Business Climate (JAN)

107.5

107.2

IFO may follow ZEW surveys last week showing higher confidence in Germany

9:00

EUR

German IFO - Current Assessment (JAN)

116.8

116.7

9:00

EUR

German IFO – Expectations (JAN)

99

98.4

9:30

GBP

Gross Domestic Product (YoY) (4Q A)

0.8%

0.5%

British productivity expected rise slightly, though BoE rate hike scope not high

9:30

GBP

Gross Domestic Product (QoQ) (4Q A)

-0.1%

0.6%

9:30

GBP

Index of Services (MoM) (NOV)

0.4%

-0.7%

British services stable as spending may largely be from government

9:30

GBP

Index of Services (3Mo3M) (NOV)

-0.1%

0.2%

11:00

GBP

CBI Trends Total Orders (JAN)

-23

-23

Measure of retail expected to weaker, further confirming recovery may be government-spending led

11:00

GBP

CBI Business Optimism (JAN)

-30

15:00

USD

Pending Home Sales (MoM) (DEC)

-1.0%

7.3%

US pending homes sales still expected weaker, supports easing until next year

15:00

USD

Pending Home Sales (YoY) (NOV)

6.9%

15:00

USD

House Price Index (MoM) (NOV)

0.0%

-0.2%

17:30

USD

Federal Open Market Committee Rate Decision

0.25%

0.25%

Expected to hold at low levels until 2013 as per Fed promise

20:00

NZD

Reserve Bank of New Zealand Rate Decision

2.50%

2.50%

RBNZ seeing moderately growing economy, still higher inflation

21:30

NZD

Business NZ Performance of Manufacturing (DEC)

45.7

Manufacturing seeing some contraction

23:50

JPY

Corporate Service Price (YoY) (DEC)

-0.1%

-0.2%

Services industry in Japan continues to be weaker

GMT

Currency

Upcoming Events & Speeches

2:00

USD

US President Obama Delivers 2012 State of the Union Address

8:00

CAD

BoC’s Carney in Panel Discussion at World Economic Forum, Davos

9:30

GBP

Bank of England Minutes

10:15

EUR

Germany to Sell Add'l EU3 Bln 30-Year Notes

15:00

EUR

Germany’s Merkel Speaks at World Economic Forum, Davos

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

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

16.5000

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

14.3200

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.1813

1.8298

7.9516

7.7618

1.2719

Spot

6.7826

5.7501

5.9324

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 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

1.3096

1.5727

77.65

0.9464

1.0227

1.0620

0.8168

100.92

121.26

Resist. 2

1.3055

1.5689

77.49

0.9434

1.0203

1.0586

0.8142

100.59

120.94

Resist. 1

1.3014

1.5652

77.33

0.9405

1.0179

1.0552

0.8116

100.27

120.61

Spot

1.2931

1.5576

77.01

0.9345

1.0132

1.0484

0.8063

99.62

119.97

Support 1

1.2848

1.5500

76.69

0.9285

1.0085

1.0416

0.8010

98.97

119.32

Support 2

1.2807

1.5463

76.53

0.9256

1.0061

1.0382

0.7984

98.65

119.00

Support 3

1.2766

1.5425

76.37

0.9226

1.0037

1.0348

0.7958

98.32

118.67

v

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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