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FOREX: USD Consolidates Ahead Of FOMC, EUR Outlook Weighed By ECB

FOREX: USD Consolidates Ahead Of FOMC, EUR Outlook Weighed By ECB

2012-10-24 13:05:00
David Song, Currency Strategist
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Talking Points

  • U.S. Dollar: Maintains Bullish Trend Ahead Of FOMC Rate Decision
  • Euro: ECB Draghi Warns Of Falling Prices, Double-Top Still In Play
  • British Pound: BoE’s King Stands Ready For More QE, But Scales Back Dovish Tone

U.S. Dollar: Maintains Bullish Trend Ahead Of FOMC Rate Decision

The greenback is struggling to hold its ground ahead of the FOMC interest rate decision, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,937, and the reserve currency may continue to give back the advance from earlier this week should the central bank keep the door open to expand its balance sheet further.

As Chairman Ben Bernanke looks to encourage a stronger recovery, the central bank head may preserve a dovish tone for monetary policy, but market participants may slowly scale back speculation for more easing should the Fed raise its fundamental assessment for the world’s largest economy. As growth and inflation gradually picks up, we may see a growing number of Fed officials scale back their willingness to implement more quantitative easing, and the committee should start to move away from its easing cycle as the very accommodative policy stance heightens the long-term risk for inflation.

As the FOMC rate decision highlights the biggest event risk for the next 24-hours of trading, the fresh batch of central bank rhetoric will heavily influence the greenback over the remainder of the week, and we may see the USDOLLAR threaten the bullish trend from earlier this month should the Fed show a greater willingness to expand its asset purchases.

Euro: ECB Draghi Warns Of Falling Prices, Double-Top Still In Play

The Euro pared the overnight decline to 1.2919 despite the slew of dismal developments coming out of the region, but the rebound in the EURUSD is likely to be short-lived as the bearish formation continues to take shape.

Indeed, European Central Bank board member Joerg Asmussen argued that giving Greece more time to achieve its budget target will ultimately translate into more money for the periphery country, while central bank President Mario Draghi struck a highly dovish tone for monetary policy, stating that its previous rate cuts were not passed onto some countries. As President Draghi warns that falling prices presents a greater risk than inflation, we should see the Governing Council continue to embark on its easing cycle, and the ECB may now look to target the benchmark interest rate as the euro-area faces a deepening recession.

With the ECB’s unlimited bond-buying program in place, the central bank may shift gears and start to address the downside risks for growth and inflation, and we should see the double-top formation in the EURUSD pan out over the near-term as the fundamental outlook for the region turns increasingly bleak.

As the EURUSD continues to come off of the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120, we should see another test of the 200-Day SMA (1.2833) for interim support, but the pair may work its way back towards the 23.6% retracement around 1.2640-50 as the debt crisis continues to drag on the real economy.

British Pound: BoE’s King Stands Ready For More QE, But Scales Back Dovish Tone

The British Pound pared the decline from the previous day as Bank of England Governor Mervyn King struck a rather neutral tone for monetary policy, and the sterling may continue to retrace the decline from earlier this month as the central bank slowly moves away from its easing cycle.

Although BoE Governor King left the door open to expand its balance sheet further, the central bank head soften his forecast for undershooting the 2% target for inflation and sees price growth ‘a little’ stronger than initially expected, and we may see the Monetary Policy Committee endorse a wait-and-see approach throughout the remainder of the year as the U.K. emerges from the double-dip recession.

However, as the relative strength index on the GBPUSD dips below interim support around the 43 figure, the short-term correction in the pound-dollar may continue to gather pace in the days ahead, and we will be closely watching the 200-Day SMA (1.5825) as it lines up with the lower bounds of the upward trending channel carried over from July.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

New Home Sales (SEP)

382K

373K

USD

14:00

10:00

New Home Sales (MoM) (SEP)

2.4%

-0.3%

USD

14:00

10:00

House Price Index (MoM) (AUG)

0.2%

CAD

14:30

10:30

Bank of Canada Monetary Policy Report

USD

14:30

10:30

DOE U.S. Crude Oil Inventories (OCT 19)

2860K

USD

14:30

10:30

DOE U.S. Gasoline Inventories (OCT 19)

1720K

USD

14:30

10:30

DOE U.S. Distillate Inventory (OCT 19)

-2218K

EUR

16:00

12:00

French Total Jobseekers Change (SEP)

21.0

23.9

EUR

16:00

12:00

French Total Jobseekers (SEP)

3030.0k

3011.0k

USD

18:15

14:15

Federal Open Market Committee Interest Rate Decision

0.25%

0.25%

NZD

20:00

16:00

Reserve Bank of New Zealand Interest Rate Decision

2.50%

2.50%

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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