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Forex: USD Struggles Ahead Of FOMC, Sterling At Risk Of Breakout

Forex: USD Struggles Ahead Of FOMC, Sterling At Risk Of Breakout

2011-08-09 13:00:00
David Song, Strategist
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Talking Points

  • U.S. Dollar: Struggles To Hold Ground Ahead Of FOMC
  • Euro: Outlook Remains Bearish, At Risk Of Breakout
  • British Pound: BoE Inflation Report On Tap, Range At Risk

The U.S. dollar lost ground during the overnight trade and greenback may face additional headwinds during the North American trade should the Federal Reserve show an increased willingness to expand monetary policy further. Although the Fed is widely expected to keep the benchmark interest rate at 0.25%, the central bank may open the door to expand its balance sheet further in light of the slowing recovery, and dovish comments from Chairman Ben Bernanke could fuel a rebound in risk appetite on bets for another round of quantitative easing.

However, we may see the Fed strike a more balanced tone for the world’s largest economy given the rise in inflation, and the central bank may see scope to implement its exit strategy over the coming months as policy makers expect growth to pick up heading into 2012. Should Chairman Bernanke talk down speculation for further easing, we may see the U.S. dollar regain its footing following the announcement, and interest rate expectations may play an increased role in driving price action for the greenback as the central bank shows an increased willingness to start normalizing monetary policy. In turn, market participants may turn increasingly bullish towards the reserve currency, and the correlation with risk may slowly decouple as the Fed looks to wind down its balance sheet.

The Euro pared the sharp decline from the previous day to reach a high of 1.4286 on Tuesday, but the near-term outlook for the EUR/USD remains bearish as it continues to consolidate within a descending triangle. As the European Central Bank increases its efforts to stem the risk for contagion, the slowing recovery in Europe certainly dampens the outlook for higher interest rates, and it seems as though the Governing Council may retain its current policy well into the following year given the ongoing turmoil within the financial system. In turn, the EU may have little choice but to expand the scope of the European Financial Stability Facility, and the euro remains at risk of facing a bearish breakout as price action continues to approach the apex.

Meanwhile, the British Pound gave back the overnight advance to 1.6407, and the Bank of England’s quarterly inflation report on tap for tomorrow could instill a bearish outlook for the sterling should the central bank see an increased risk of undershooting the 2% target for price growth. At the same time, the central bank may see a threat of a double-dip recession given the tepid pace of growth, and the BoE may show an increased willingness to expand monetary policy further in an effort to balance the risks for the region. In turn, the range-bound price action in the GBP/USD may give way, and the exchange rate may give back the advance from the previous month as interest rate expectations falter.

Will the Descending Triangle in the EUR/USD Continue To Play Out? 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

14:00

10:00

IBD/TIPP Economic Optimism (AUG)

41.4

USD

18:15

14:15

Federal Open Market Committee Interest Rate Decision

0.25%

0.25%

Currency

GMT

Release

Expected

Actual

Comments

NZD

22:45

NZ Card Spending (MoM) (JUL)

0.5%

0.4%

Expands for second month.

NZD

22:45

NZ Card Spending - Retail (MoM) (JUL)

0.5%

0.2%

GBP

23:01

BRC Sales Like-For-Like (YoY) (JUL)

-0.5%

0.6%

Rises for third time this year.

GBP

23:01

RICS House Price Balance (JUL)

-28%

-22%

Declines for 13 straight months.

JPY

23:50

Japan Money Stock M2+CD (YoY) (JUL)

2.9%

2.9%

Holds steady for second month.

JPY

23:50

Japan Money Stock M3 (YoY) (JUL)

2.2%

2.3%

AUD

1:30

Home Loans (JUN)

0.8%

0.0%

Fails to grow for the fourth time this year.

AUD

1:30

Investment Lending (JUN)

--

-4.4%

AUD

1:30

Value of Loans (MoM) (JUN)

--

0.0%

AUD

1:30

NAB Business Confidence (JUL)

--

2

Sixth positive reading in 2011.

AUD

1:30

NAB Business Conditions (JUL)

--

-1

CNY

1:30

Consumer Price Index (YoY) (JUL)

6.4%

6.5%

Fastest pace of growth since June 2008.

CNY

1:30

Producer Price Index (YoY) (JUL)

7.5%

7.5%

JPY

5:00

Consumer Confidence (JUL)

37.0

37.0

Highest since March.

CHF

5:45

SECO Consumer Confidence (JUL)

-5

-17

Lowest since July 2009.

EUR

6:00

German Trade Balance (euros) (JUN)

14.0B

12.7B

Surplus narrows, dampening the outlook for future growth.

EUR

6:00

German Current Account (euros) (JUN)

11.0B

11.9B

EUR

6:00

German Exports s.a. (MoM) (JUN)

-1.0%

-1.2%

EUR

6:00

German Imports s.a. (MoM) (JUN)

-1.5%

0.3%

JPY

6:00

Machine Tool Orders (YoY) (JUL P)

--

34.6%

Slows for fourth time this year.

EUR

6:45

French Central Government Balance (euros) (JUN)

--

-61.3B

Holds above 60B for third month.

CNY

7:40

Industrial Production (YoY) (JUL)

14.6%

14.0%

Slows for the fourth month in 2011.

CNY

7:40

Industrial Production (YTD) (YoY) (JUL)

14.3%

14.3%

CNY

7:40

Fixed Assets Investment ex Rural (YTD) (YoY) (JUL)

25.5%

25.4%

Lowest since April.

CNY

8:10

Retail Sales (YoY) (JUL)

17.7%

17.2%

Slows for fourth time this year.

CNY

8:10

Retail Sales (YTD) (YoY) (JUL)

17.0%

16.8%

GBP

8:30

Industrial Production (MoM) (JUN)

0.4%

0.0%

Fails to grow for third time this year.

GBP

8:30

Industrial Production (YoY) (JUN)

0.2%

-0.3%

GBP

8:30

Manufacturing Production (MoM) (JUN)

0.2%

-0.4%

Contracts for third time in 2011.

GBP

8:30

Manufacturing Production (YoY) (JUN)

2.8%

2.1%

GBP

8:30

Visible Trade Balance (Pounds) (JUN)

-8.100B

-8.873B

Largest deficit since December.

GBP

8:30

Trade Balance Non EU (Pounds) (JUN)

-4.800B

-5.718B

GBP

8:30

Total Trade Balance (Pounds) (JUN)

-3.600B

-4.496B

USD

11:30

NFIB Small Business Optimism (JUL)

89.9

89.9

Lowest since September 2010.

CAD

12:15

Housing Starts (JUL)

193.2K

USD

12:30

Unit Labor Costs (2Q P)

2.3%

USD

12:30

Non-Farm Productivity (2Q P)

-0.9%

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