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Dollar Looks to Fed Chatter, US Data for Direction as QE3 Bets Resurface

Dollar Looks to Fed Chatter, US Data for Direction as QE3 Bets Resurface

Ilya Spivak, Head Strategist, APAC

Talking Points

  • Dollar Has Scope to Rise Unless Fed Chatter, US Data Adds New Fuel to QE3 Bets
  • Aussie Dollar Lags on Disappointing Chinese Industrial Profits Data in Asian Trade

The US Dollar (ticker: USDollar) corrected narrowly higher in overnight trade as the greenback digested a 0.4 percent drop over the preceding 24 hours that brought the benchmark currency to the lowest in three weeks. The Australian Dollar underperformed after China’s Industrial Profits fell 5.2 percent in the 12 months through February, marking the first annualized decline since August 2009.

Looking ahead, a quiet economic calendar in European hours is likely to keep the focus on US monetary policy expectations. Stocks rose while the Dollar tumbled yesterday after Federal Reserve Chairman Ben Bernanke said accommodative monetary policy was needed to stoke improvement in the labor market, fueling hopes that a third round of quantitative easing (QE3) may be in the cards. A disappointing set of US economic data offered a fitting backdrop for the Fed chief’s comments.

With this in mind, the spotlight turns to the Conference Board’s US Consumer Confidence gauge and the Richmond Fed Manufacturing Survey index. Both measures are expected to pull back in March, likely reflecting February’s run-up in oil prices. A busy Fed speaking calendar is likewise on tap, with FOMC members Bill Dudley and Elizabeth Duke – both of whom lean to the dovish side of the policy spectrum –scheduled to come across the wires. Ben Bernanke is also scheduled to give the third of a series of lectures at George Washington University, although the first two outings didn’t prove to contain market-moving content.

On balance, this seems to set the stage for a repeat of yesterday’s price action. The markets are noticeably unwilling to commit to directional momentum however, with S&P 500 stock index futures flat in overnight trade. This warns that investors may not be quite as sold on the prospects for QE3 as yesterday price action would suggest. Indeed, Bernanke’s mention of accommodative monetary policy need not have referred to asset purchases at all and may have been aimed at the pledge to keep rates low through late 2014.

This hints to the possibility for a reversal as yesterday’s move begins to look overdone and a correction ensues. The likelihood of such an outcome depends squarely on the ability of the US calendar to meaningfully advance the argument that growth is faltering and additional stimulus is an active point of discussion at the central bank. Outcomes in line with the tone set on Monday are unlikely surprise at this point and so may not prove adequate to fuel follow-through, whereas upside surprises stand to trigger sharp snap-back as markets backpedal.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

25:50

JPY

Corporate Service Price Index (FEB)

-0.6%

-0.4%

-0.4% (R-)

1:30

CNY

Industrial Profits YTD YoY (FEB)

-5.2%

-

25.4%

5:00

JPY

Small Business Confidence (MAR)

48.7

-

45.3

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:00

EUR

German Import Price Index (MoM) (FEB)

0.9%

1.3%

Low

6:00

EUR

German Import Price Index (YoY) (FEB)

3.5%

3.7%

Low

6:00

CHF

UBS Consumption Indicator (FEB)

-

0.92

Medium

7:00

EUR

German GfK Consumer Confidence (APR)

6

6

Medium

10:00

GBP

CBI Reported Sales (MAR)

-5

-2

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3245

1.3421

GBPUSD

1.5857

1.6030

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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