DailyFX.com - US Dollar Turn Can Forge Trend on Fed Decision, NFPs, 2Q GDP

Fundamental Forecast for Dollar:Bullish

  • The Dollar advanced this past week – with remarkable progress from EURUSD and GBPUSD – despite a tepid fundamental backdrop
  • Event risk fills out this week with high profile events like the FOMC Decision, NFPs, and 2Q GDP to spur rate forecasts and risk trends
  • Watch the volume on dollar-based majors with the release of NFPS using the FXCM Real Volume indicator

There was little in the backdrop that should have meaningfully bolstered the US Dollar. Interest rate expectations measured through yields and Fed Fund futures were stagnant. Meanwhile, sentiment trends came nowhere near the necessary risk aversion intensity to spur a demand for the haven’s liquidity. And yet, the greenback put in for a meaningful turn. From the precipice of breaking a 17-month range support, the Dow Jones FXCM Dollar Index (ticker = USDollar) has climbed. From the majors, that has manifested in a EURUSD break to 8-month lows below 1.3500 and a tentative GBPUSD reversal back below 1.7000. However, this turn is not yet a reliable trend that can override the general lassitude in financial markets. Yet, that may change in the turbulence of this week’s packed calendar.

Though there is a flood of top-tier US event risk penciled in this coming week, three particular releases stand out: the second quarter US growth report (US 2Q GDP), the FOMC rate decision and July nonfarm payrolls (NFPs). These are not only high-profile events with a history of induced volatility, but they are capable of shaping the FX market’s most prominent fundamental themes: interest rate expectations and sentiment trends. Between these two overriding fundamental subjects, the timing and pace of the Fed’s monetary policy is more susceptible to change. Yet, should one or more of these events strike a risk nerve, the potential is far greater.

The major event risk will be split into two discrete sessions: the New York sessions on Wednesday and Friday. And, with all of these events, there is worth noting that there is a skew of possible impact to certain outcomes. In the first round of event risk, we have the growth report and policy decision. This past week, the IMF downgraded its 2014 GDP forecast sharply (2.8 to 1.7 percent) after the unexpected 1Q contraction. This tempers expectations even though the Fed and market have maintained optimism for a quick rebound in the 2Q. We will see if that is the case, but a disappointment could be the greater surprise here than a rebound that meets or outpaces expectations. Yet, a weaker pace of recovery is unlikely to materially shift the need for policy normalization. So GDP may prove a more capable risk driver.

Later in the same session, this FOMC rate decision will not provide the updated forecasts (on employment, inflation and interest rates) nor Chairwoman Janet Yellen’s press conference. That means, we are left to an expected Taper – third to last if their pace holds – and evaluating the monetary policy statement for tone. The central bank has remained elusive on their timing for a policy shift and its subsequent pace – at least that‘s how markets seem to be treating it. Policymakers cannot pre-commit or they would risk a causing a greater surprise should conditions change and warrant a different policy approach. That said, the interest rate forecasts (often referred to as the ‘blue dots’) are fairly straightforward. They project a first hike in mid-2015, a benchmark rate of 1.12 percent by end of 2015 and 2.50 percent by the close of 2016. Yet, Fed Funds futures, swaps and yields are all discounting that tempo. That is a lot of room to close the gap.

Should the combined outcome for the FOMC and GDP leave the market on the fence, the tension will be particularly high for Friday’s NFPs. Yet, the jobs data isn’t only one facet to a more complete picture to develop that day. The Fed’s two primary policy mandates are maximum employment and stable prices. The labor statistics are a clear rudder for the former. Yet also due Friday is the personal consumption expenditure (PCE) report for June. This is the Fed’s preferred inflation measure – rather than the CPI. Where the FOMC decision can seem vague, the combination of these two indicators is straightforward. – JK

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  3. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  4. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  5. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  8. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
  9. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Lion economies

    A nickname given to Africa's growing economies.
  4. Factor Investing

    An investment strategy in which securities are chosen based on ...
  5. Reverse Gold ETF

    Exchange traded funds that are designed to trade in a direction ...
  6. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
RELATED FAQS
  1. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  4. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  5. Are there leveraged ETFs that follow the retail sector?

    There are many exchange-traded funds (ETFs) that track the retail sector or elements of the retail sector, and some of those ... Read Full Answer >>
  6. What are some of the most popular ETFs that track the retail sector?

    Some of the most popular exchange-traded funds (ETFs) that track the retail sector include the iShares S&P Global Consumer ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!