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Dollar Inches Back After Post-Philly Fed Beatdown - What Happened?

Dollar Inches Back After Post-Philly Fed Beatdown - What Happened?

Christopher Vecchio, CFA, Senior Strategist

INTRADAY PERFORMANCE UPDATE: 09:30 GMT

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

+0.21%

-0.24%

-0.17%

-0.12%

-0.05%

-0.07%

-0.06%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): 0.00% (+0.12%prior 5-days)

ASIA/EUROPE FOREX NEWS WRAP

The US Dollar wiped out the week’s gains over the course of a few hours yesterday after a batch of mixed yet important data. I believe that the aggregate impact of the improved weekly Initial Jobless Claims figure, the solid July US Consumer Price Index, and the the weak Philadelphia Fed Index created a nightmare scenario for investors in a thin market yesterday.

With the Fed’s stated goal for the QE3 circuit breakers either the Unemployment Rate falling to 6.5% or yearly inflation holding +2.5%, any incremental efforts towards these goals has tended to have a more dramatic impact on QE3 “taper trade” components – US Treasuries, US stocks, the US Dollar, and precious metals.

So with the weekly jobs data and the monthly inflation reading clearly pro-taper, it is the Philly Fed Index’s fault for the sharp selloff in US equity markets and the US Dollar. The Philly Fed Index is widely considered to be a top leading indicator for growth in the US, with Goldman Sachs recently anointing it (next to the weekly Initial Jobless Claims) as the best proxy for growth.

Thus: yesterday’s data said that the Fed is going to taper in a weak growth environment. This is the worst case scenario for investors: the economy isn’t strong enough to withstand a drawdown in stimulative efforts; yet the Fed is going to do so anyway. This would also explain the flock to safety yesterday – the Japanese Yen, the Swiss Franc, and Gold were all top performers against the US Dollar.

USDJPY 5-min Chart: Friday, August 16, 2013 Intraday

Dollar_Inches_Back_After_Post-Philly_Fed_Beatdown__What_Happened_body_Picture_1.png, Dollar Inches Back After Post-Philly Fed Beatdown - What Happened?

If the sentiment surrounding the US Dollar is going to be revived this week, overnight price action has already been constructive, though the upcoming data today will truly be necessary. Of note, July US housing data is expected to rebound, after the June figures showed that the uptick in interest rates in the prior two months had reduced the appeal of buying a home.

Read more: Point, Taper: Improved July Retail Sales Report Lifts US Dollar as Yields Jump

ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION

Dollar_Inches_Back_After_Post-Philly_Fed_Beatdown__What_Happened_body_x0000_i1028.png, Dollar Inches Back After Post-Philly Fed Beatdown - What Happened?

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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

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