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US Dollar May Rise as Fed Leaves 2016 Rates Outlook Unchanged

US Dollar May Rise as Fed Leaves 2016 Rates Outlook Unchanged

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Yen declines, Pound corrects higher as Asian shares digest “Brexit” fears
  • US Dollar may rise if Fed economic and rates forecasts hold unchanged
  • Status-quo FOMC posture may trigger risk aversion, sink commodity FX

The Yen underperformed in overnight trade as Asian stocks corrected higher following four consecutive days of losses that brought prices to a three-week low. The cautiously risk-on mood undermined demand for the anti-risk Japanese unit while boosting the British Pound, underscoring the centrality of “Brexit” worries in driving the slump in sentiment since late last week.

Looking ahead, all eyes are on the Federal Reserve monetary policy announcement. The central bank will unveil an updated set of economic and interest-rate forecasts in addition to its regular post-meeting statement and Chair Janet Yellen will hold a press conference. Priced-in expectations implied in Fed Funds futures contracts envision a mere 2 percent probability of an interest rate hike.

Traders’ Fed policy outlook took a sharp dovish turn after May’s dismal payrolls figures and markets will look to the central bank for validation. For their part, central bank officials have been somewhat dismissive, warning that it would be unwise to over-extrapolate from a single data point subject to multiple revisions in the coming months.

This means that investors could be surprised to find the plan for two rate hikes this year as well as baseline forecasts for growth, employment and inflation remain broadly unchanged. Such a result would appear hawkish relative current priced-in bets and seems likely to push the US Dollar higher. It may likewise stoke renewed risk aversion, applying outsized pressure on the Australian, Canadian and New Zealand Dollars.

Asia Session

GMTCCYEVENTACTEXPPREV
21:00NZDREINZ House Sales (YoY) (MAY)13.6%-18.4%
22:45NZDBoP Current Account Balance (1Q)1.306b0.960b-2.894b
22:45NZDCurrent Account GDP Ratio YTD (1Q)-3.0%-3.0%-3.2%
23:30AUDWeekly Consumer Confidence Index (JUN 12)116.4-116.8
00:30AUDWestpac Consumer Conf Index (JUN)102.2-103.2
00:30AUDWestpac Consumer Conf SA (MoM) (JUN)-1.0%-8.5%
03:00NZDNon Resident Bond Holdings (MAY)68.5%-66.5%
06:00JPYMachine Tool Orders (YoY) (MAY F) --25.0%

European Session

GMTCCYEVENTEXPPREVIMPACT
08:30GBPClaimant Count Rate (MAY)2.1%2.1%Medium
08:30GBPJobless Claims Change (MAY)0.0k-2.4kMedium
08:30GBPAverage Weekly Earnings (3M/YoY) (APR)1.7%2.0%Low
08:30GBPWeekly Earnings ex Bonus (3M/YoY) (APR)2.0%2.1%Low
08:30GBPILO Unemployment Rate (3Mths) (APR)5.1%5.1%Medium
08:30GBPEmployment Change (3M/3M) (APR)60k44kLow
09:00EUREurozone Trade Balance SA (APR)21.5b22.3bLow
09:00EUREurozone Trade Balance NSA (APR)26.0b28.6bLow

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3
EURUSD1.10131.11221.11651.12311.12741.13401.1449
GBPUSD1.37991.39791.40461.41591.42261.43391.4519

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

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

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