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Forex: U.S. Dollar Outlook Hinges On FOMC Minutes As QE2 Comes To An End

Forex: U.S. Dollar Outlook Hinges On FOMC Minutes As QE2 Comes To An End

2011-05-18 12:45:00
David Song, Currency Strategist
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Talking Points

  • British Pound: Eyes 1.6000 As BoE Maintains Balanced Outlook
  • Euro: ECB Holds Hawkish Tone Despite Heightening Risk For Contagion
  • U.S. Dollar: FOMC Meeting Minutes On Tap

U.S. dollar price action was largely mixed during the overnight trade, and the short-term outlook for the greenback certainly hinges on the FOMC meeting minutes due out later today as currency traders weigh the prospects for future policy. As the FOMC plans to conclude the additional $600B in quantitative easing, market participants will keep a close eye on what the central bank intends to do in the second-half of the year. The committee may start to layout the foundations for its exit strategy, but the central bank is likely to endorse a wait-and-see approach for the third-quarter as it aims to encourage a sustainable recovery. At the same time, the Fed may also highlight an increased risk for inflation as economic activity gradually gathers pace, and hawkish commentary from the central bank could generate a bullish reaction in the USD as investors expect the committee to gradually normalize monetary policy going forward. However, currency traders may show a bearish U.S. dollar reaction should the Fed deliver a balanced statement, and the greenback may struggle to hold its ground as interest rate expectations falter. The British Pound slipped to a fresh monthly low of 1.6125 following a slew of disappointing developments out of the U.K. Unemployment claims in Britain increased for the second consecutive month in April, while the Bank of England maintained a cautious outlook for the region. The policy meeting minutes showed the Monetary Policy Committee voted 6-3 to keep the benchmark interest rate at 0.50% in May, with the majority arguing that higher borrowing costs could “adversely affect consumer confidence,” which would lead to an “exaggerated impact” on private sector consumption.

Moreover, the MPC said that a case could be made to ease monetary policy should “the downside risks to household spending to materialize,” but went onto say inflation expectations could “drift upwards” given the stickiness in price growth. Indeed, the balanced tone held by the BoE will continue to dampen the prospects for a rate hike in 2011, and the GBP/USD looks poised to work its way back towards former resistance around 1.6000 as it searches for support. Nevertheless, market participants still see borrowing costs in the U.K. increasing by nearly 50bp over the next 12-months according to Credit Suisse overnight index swaps, and the British Pound could face range-bound price action over the near-term as investors weigh the risks for the U.K.

The Euro fell back from a high of 1.4285 and the single-currency is likely to face additional headwinds over the near-term as European policy makers consider ‘reprofiling’ Greece’s government debt. European Central Bank board member Vitor Constancio said an adjustment path for Greece could be in store to avoid a default, but argued that restructuring the debt ought to be “the last resort” as it entails “enormous consequences.” Despite the heightening risk for contagion, Governing Council member Ewald Nowotny said interest rates in Europe will continue as growth and inflation accelerate, and went onto say that a restructuring/rescheduling of Greece’s debt is “definitely not an element of discussion” at the central bank. The mixed outlook held by the Governing Council could make it increasingly difficult for the ECB to raise the benchmark interest rate further in the first-half of the year, and the board is widely expected to maintain its wait-and-see approach in June as the economic outlook remains clouded with high uncertainty. In turn, the EUR/USD may consolidate further heading in the following month, and the exchange rate could make another run at 1.4000 as it struggles to retrace the decline from the previous week.

Is the EUR/USD Carving Out A Head-And-Shoulders Top? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

11:00

07:00

MBA Mortgage Applications (May 13)

--

8.2%

CAD

12:30

08:30

Leading Indicators (MoM) APR

0.6%

0.8%

CAD

12:30

08:30

Wholesale Sales (MoM) MAR

1.2%

-0.6%

USD

18:00

13:00

FOMC Meeting Minutes

--

--

Currency

GMT

Release

Expected

Actual

Comments

NZD

22:45

Producer Prices – Inputs (QoQ) Q1

--

2.2%

Climbs at fastest pace Q3 ‘08

NZD

22:45

Producer Prices – Outputs (QoQ) Q1

--

1.7%

Fastest growth since Q1 ‘10

JPY

23:50

Tertiary Industry Index (MoM) MAR

-5.8%

-6.0%

3rd contraction in last 4

AUD

00:30

Westpac Consumer Confidence MAY

--

-1.3%

3rd contraction in last 5

AUD

00:30

Westpac Consumer Confidence Index MAY

--

103.9

Lowest since June ‘09

AUD

01:00

DEWR Skilled Vacancies (MoM) MAY

--

-0.4%

Falls back into contraction after escaping for last 3 months

AUD

01:30

Wage Cost Index (QoQ) Q1

1.1%

0.8%

Weakest growth since Q2 ‘10

AUD

01:30

Wage Cost Index (Yoy) Q1

4.0%

3.8%

Eases off 8 quarter high in Q4 ‘10

JPY

04:00

Tokyo Condominium Sales (YoY) APR

--

-27.3%

2nd contraction in last 4

GBP

08:30

Jobless Claims Change APR

0.0K

12.4K

UK labour market continues to weaken as private sector hiring slows amid soft growth.

GBP

08:30

Average Weekly Earnings inc Bones (3MoY) MAR

2.0%

2.3%

GBP

08:30

Average Weekly Earnings ex Bones (3MoY) MAR

2.2%

2.1%

GBP

08:30

Claimant Count Rate APR

4.5%

4.6%

GBP

08:30

ILO Unemployment Rate (3M) MAR

7.8%

7.7%

EUR

09:00

Euro-zone Construction Output (MoM) MAR

--

-0.3%

4th contraction in last 5

EUR

09:00

Euro-zone Construction Output (YoY) MAR

--

-4.9%

8th contraction in last 9

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