Dollar Breakout Risk High on Fed, But a Trend?

By DailyFx | Updated July 30, 2014 AAA

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Talking Points:

  • Dollar Breakout Risk High on Fed, But a Trend?
  • British Pound Undeterred in Rate Hike Hopes After CPI
  • Euro Can Sink Further as Rates Drop – Especially if Fed Holds Course

Dollar Breakout Risk High on Fed, But a Trend?

Between narrow trading ranges for the dollar-backed majors and the impending FOMC rate decision, there is substantial breakout risk for the world’s most liquid currency pairings. A lack of room to move is certainly a consideration for volatility, but the true spark in this equation is the influence that the event risk carries. Heading into the Federal Reserve’s scheduled monetary policy decision, the market has already priced in the baseline change of a further $10 billion reduction in the monthly QE purchases to a $35 billion. If it is priced in, it is unlikely to be market moving unless there is a very unlikely hold or acceleration of the Tapering pace. If this were the only dimension to this event, there would be little to fuel speculation in either US rate forecasts (important to the dollar) or unsettle comfort in complacency and leverage (critical to ‘risk trends’). However, there is more to this event…

Besides the Taper decision and the regular monetary policy statement, this central bank meeting will issue new Fed forecasts for interest rates, employment, inflation and growth. And, 30 minutes later, Chairwoman Janet Yellen will preside over her second official press conference. There is significant scope in this event risk to change the consensus forecast for the timing of the first FOMC hike and the subsequent pace of future moves. The economic projections will take a backseat to the interest rate expectations (the infamous ‘blue dots’) as they drill down to the heart of what really matters for funds seeking return and funded on cheap borrowed capital. If there is any shift back or forward in the vote count for members believing the ‘appropriate’ time for the first rate hike – the majority 81 percent see a 2015 turn – it will change the dollar’s first-mover status. But it isn’t just the first move that matters. The pace of tightening over time is far more important to actual returns. As such, the ‘blue dots’ which show the cluster of where each member expects rates to be at the end of each year through 2016 (and the ‘Longer Run’) will provide far more to work with. To see more on this event and the strategy approach see today’s Strategy Video.

British Pound Undeterredin Rate Hike Hopes After CPI

The Bank of England is considered to on one of the most hawkish rate paths amongst the major central banks. Comments from Governor Carney last week suggesting a tightening move may come earlier than many in the market appreciate only furthered expectations and the sterling. The jump in the currency and yields into the end of last week has cooled, but it hasn’t corrected. Given the nearly year-long advance from both, that is not particularly surprising – even for those that believe this outcome is almost or fully priced in at this point. Yet, what is surprising is that there hasn’t even been a modest correction in the wake of a weak inflation data release. The CPI reading cooled to a four-and-a-half year low 1.5 percent this past session – remarkably tepid for a central bank seen so close to that first hike…

Euro Can Sink Further as Rates Drop – Especially if Fed Holds Course

This past session, the Euro docket was offering up an unflattering view of investor sentiment in Germany with the cumulative outlook for the country dropping back to its lowest level since the beginning of 2013. Yet, this isn’t where the market’s interest truly lie. A deeper fundamental cut comes on the party of yields. Three-month Euro rates have tumbled nearly 24 percent in the weeks since the ECB introduced its new stimulus. Higher market rates were an important factor to the currency’s build up. There is plenty of room to drop. And don’t forget risk trends…

New Zealand Dollar Faces Key Event Risk in 1Q GDP Update

When there is a major fundamental release like the FOMC rate decision, even a market as global as Foreign Exchange can show the symptoms of tunnel vision. Kiwi dollar traders should keep their heads up though in the upcoming session as the New Zealand 1Q GDP release is due just hours after the US central bank shoves the markets. Already an important economic update, this indicator will see its impact amplified by the market’s recent rally following last week’s RBNZ hike. Fears of a pause in the policy regime could easily trigger a retracement.

Oil Prices Rally on ISIS Concerns in Iraq, But is $110 Realistic?

We are seeing the world’s energy supply concerns shifting from the Ukraine (still an unresolved situation) to Iraq. A rise in power for the Islamic State in Iraq and Syria (ISIS) is unnerving the West and raises geopolitical tensions as well as oil prices. We have seen US-based WTI rally to within arm’s reach of $108 and UK-favored Brent climb to nearly $115. These are hearty moves and are founded on significant uncertainty. However, to gain further, this skeptical market may need to see supply constraint concerns evolve into real curbs.

Emerging Markets Stumble Ahead of Fed Decision

Despite the general bullish bearing on global equities this past session, Emerging Markets were not so willing to fold into the yield-reach. The MSCI Emerging Market ETF was little changed follow the past week’s correction while the FX players were broadly lower on the day. Among the bigger moves, the Brazilian Real dropped 1.2 percent against the dollar, the South African Rand fell 0.8 percentand the Mexican Peso eased 0.5 percent. Thebreadth of this weakness and lack of data to drive it suggests this asset group is highly attuned to cheap funding.

Gold Maintains Bear Trend as Another Central Bank Weighs Stimulus Withdrawal

Though it was technically a second consecutive daily decline for gold this pas session, the 0.1 percent slide was rather modest. This was especially notable given how substantially the correction was for the precious metal earlier in the session. The outlook for rising rates is a burden for gold which has no utility in the form of yields. If the FOMC offers up a more hawkish tone today, gold may drop back to $1,250.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

Australia Leading Index - Conference Board (APR)

0.0%

The leading index has been on a upward trend since 2009 although its slowed this year, while Australian real GDP grew at 4.5% annual rate for Q1

0:00

AUD

Australia Economic Survey - Bloomberg (JUN)

0:30

AUD

Australia Leading Index - Westpac (MAY)

-0.5%

1:30

CNH

China Property Prices (MAY)

May New homes prices declined m/m in half of 70 major cities tracked; up from 8 cities that saw price drops in April

1:45

CNH

China Business Confidence - MNI (JUN)

53.7

Business conditions remains in expansionary territory above 50

5:30

JPY

Japan Nationwide Dept Store Sales (MAY)

-12.0%

Fell to lowest levels since March 2011.

8:00

ZAR

South Africa Current Account (1Q) (Emerging Markets)

-214B

-179B

Current account has been declining steadily since 2010, but may be showing signs of a rebound.

8:00

ZAR

South Africa CPI (MAY) (Emerging Markets) (YoY)

6.5%

6.1%

Inflation has remained within 5-6% range since 2011 after spiking above 10.0% in 2008.

9:00

EUR

Eurozone Construction Output (APR) (MoM)

-0.6%

Weak construction output adds to other indications that the Eurozone ended Q1 with a weak outcome

9:00

CHF

Switzerland Investor Sentiment - ZEW (JUN)

7.4

Investor sentiment reached 4 year highs at the end of 2013 and has been falling since.

11:00

USD

US Mortgage Applications - MBA (Jun 13)

10.3%

Mortgage applications rose to near its highest levels this year.

12:30

CAD

Canada Wholesale Trade Sales (APR)

0.5%

-0.4%

Wholesale trade declined more than it did in the same period last year.

12:30

USD

US Current Account Balance (1Q)

-$97.0B

-$81.1B

A strengthening US economy should see Current Account Deficit expand as demand for imports increase

14:30

USD

US DoE Crude Inventories | Implied Demand (Jun 13)

15977

Crude oil inventories rises to near highs for the year.

18:00

USD

FOMC Rate Decision

0.25%

0.25%

Recent weak economic data for Q2 has made markets wary of the tone of the Fed in the upcoming announcement.

22:45

NZD

New Zealand GDP SA (1Q) (QoQ)

3.7%

3.1%

RBNZ raised rates for a third time this year in the most recent meeting to deal with inflationary pressures from strong economic growth

GMT

Currency

Upcoming Events & Speeches

1:00

AUD

Australia to Sell A$700 Mln in 10-Year Bonds

8:00

EUR

Finland Fin Min to Give Economic Forecast | Discuss Govt Form

8:30

EUR

Spain to Sell 3 and 5-Year Bonds

8:30

GBP

BoE Meeting Minutes

9:35

EUR

Germany to Sell €5 Bln in 10-Year Bonds

11:15

GBP

BoE's Weale to Speak

12:30

USD

US BEA Releases Current Account Revisions

13:45

GBP

BoE MPC Designate Kristin Forbes Appointment Hearing

17:30

GBP

BoE's Haldane to Speak

17:45

USD

Former Fed Chairman Bernanke to Speak

18:00

USD

FOMC Updated Forecasts

18:30

USD

Fed Chairwoman Yellen Press Conference

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.1098

2.1509

10.8433

7.7515

1.2533

Spot

6.6384

5.5039

6.0034

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3625

1.7061

102.80

0.9049

1.0917

0.9406

0.8733

139.30

1287.18

Res 2

1.3606

1.7037

102.63

0.9035

1.0903

0.9389

0.8716

139.06

1283.01

Res 1

1.3587

1.7013

102.46

0.9020

1.0889

0.9372

0.8699

138.83

1278.84

Spot

1.3548

1.6965

102.13

0.8991

1.0862

0.9339

0.8665

138.36

1270.51

Supp 1

1.3509

1.6917

101.80

0.8962

1.0835

0.9306

0.8631

137.89

1262.18

Supp 2

1.3490

1.6893

101.63

0.8947

1.0821

0.9289

0.8614

137.66

1258.01

Supp 3

1.3471

1.6869

101.46

0.8933

1.0807

0.9272

0.8597

137.42

1253.84

v

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