Dollar and S&P 500 Ready for Fed Rate Decision

Dollar and S&P 500 Ready for Fed Rate Decision
British Pound Awaits UK Budget, BoE Go Ahead for Stimulus
Euro Tests Four Month Lows as Cyprus Plan Rejected
Japanese Yen: What will Kuroda Do in His First Day at the BoJ Reins
New Zealand Dollar Weighs RBNZ Warnings against 4Q GDP
GoldClimbs a Fourth Day, Focus Shifts from Euro Risk to Stimulus

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Dollar and S&P 500 Ready for Fed Rate Decision
The dollar finally regained its composure this past session as fear of a systemic risk spread starts to creep back into the picture. With the Eurozone / Cyprus troubles deepening and the Federal Open Market Committee (FOMC) decision due ahead, we have the kind of heavy event risk that can revive true fear and in turn resync fundamental correlations rooted in investor sentiment. On the other hand, having so many big-ticket fundamental trends on tap creates a larger possibility of ‘crosswinds’. For example, if the euro regains ground and stalls the dollar through its most liquid pairing – EURUSD – it can temper the influence of a ‘favorable’ Fed stimulus outcome. We have to traverse this minefield carefully and keep a close eye on how the different fundamental themes interact.

There are two systemic themes facing the dollar through the immediate future: the navigation of Fed stimulus and weight of underlying risk trends. Already this week, we have seen the early return of the familiar ‘risk trend’-based correlations. With the EURUSD sliding, yen crosses gapping lower and the S&P 500 down for three consecutive days; the usual suspects are once again moving in concert. However, the source of this drive is still lacking for the clout necessary to tip the scales to the ‘fear’ or ‘greed’ extremes and drive the trend that can keep correlation and momentum in place. The Cyprus story (more on that below) can certainly spur global risk through Eurozone financial crisis waves, but that is still a few steps of uncertain escalation ahead. A way to throttle speculative appetite and the dollar immediately though is through the Fed decision.

At the last FOMC gathering, the group offered familiar vows, chief among them that policy would remain accommodative until the unemployment rate was seen returning to 6.5 percent and the inflation forecast remains below 2.5 percent. However, the statement also suggested that policy would still be ‘accommodative’ when the quantitative easing effort is halted and reversed (focusing in on interest rates). Since that meeting, we have seen the US jobless rate dropped to a four-year low 7.7 percent and Chairman Ben Bernanke said in Congressional testimony that the discussion of the QE exit would begin ‘soon’.

For traders (FX and capital market), the interest is not in seeing discussion of a rate hike. There is little to no expectation of that until at least mid-next year. The real market moving aspect of this event is any hint that the Fed’s as-of-yet unrivaled stimulus drive will end – just as speculation of Bank of Japan and Bank of England efforts ramp up. The consensus is for the Fed to play it safe and not provoke a highly-sensitive equity market into a tumble with talk of a clear time frame for a stimulus exit. However, there is plenty of opportunity for the masses to extract that information for themselves. With this Fed decision, we have more than just the policy decision and statement. This quarterly event brings with its forecasts for growth, inflation and interest rates along with Bernanke’s press conference. And, it is interesting to note that the time between the policy decision and ‘presser’ has been reduced to 30 minutes – likely an effort to stem negative speculation on perceptible change.

British Pound Awaits UK Budget, BoE Go Ahead for Stimulus
Risk trends could carry significant influence over the sterling’s next move, but there is plenty of native event risk to make a systemic shift behind the currency all on its own. The morning opens up with top-tier – but ‘standard’ – event risk. The February labour data is known for its influence over volatility and leading assessment of general growth trends. However, it is the least influential event on the UK docket. The Bank of England (BoE) minutes cross the wires at the same time, but its report on the vote count for more stimulus at the last policy gathering (last go around, 3 members voted for more gilt purchases) will be seen as a shot in the competitive stimulus wars. Top billing, though, goes to Chancellor Osborne’s 2013 budget. We see how committed the government can hold to its austerity drive, reflection on economic collateral damage and targets for both. Where traders are really looking though is any allowances for the BoE to bolster its stimulus effort.

Euro Tests Four Month Lows as Cyprus Plan RejectedThe unprecedented Cyprus bailout preconditions have effectively revived fears of systemic Eurozone financial troubles. This past session, the Cypriot Parliament firmly rejected an adapted proposal of the bank levy – taking money from deposits to partially fund the country, banking systems rescue – that President Anastasiades, Finance Minister Sarris and EU officials initially agreed to. Though accounts under €20,000 would have been spared, the measure received 36 votes against, 19 abstentions and no votes in favor. This situation is a mess. A second vote on a revised program is likely in the coming days. Otherwise, a return to Euro-area authorities will not likely yield any more favorable conditions as there is an adamant stand against another Greek-style rescue. If Cyprus passes a bank level, it will set a dangerous precedent for fragile confidence in Greece, Spain and Italy. And, as we wait, questions churn as to whether the ECB will cut off liquidity to Cyprus banks…

Japanese Yen: Kuroda Takes the BoJ Reins, Market Waiting
It’s official. The Bank of Japan (BoJ) is now headed by Haruhiko Kuroda. Now it is time for the vocal stimulus supporter to offer satisfaction to those speculating on a significant escalation of the central bank’s efforts. There is no doubt a contingent of the market is expecting immediate moves by the BoJ – moving forward the 13 trillion yen-per-month program would be most influential. But so far Kuroda is mum for the holiday.

New Zealand Dollar Weighs RBNZ Warnings against 4Q GDP
Trade – a vital component of the New Zealand economy – proved weaker in the fourth quarter than economists had expected with a NZ$3.255 billion deficit. That is notable, but not as influential as the unsettled risk theme that lies before us nor tomorrow’s 4Q GDP release. The economy is seen growing 0.9 percent last quarter according to the consensus forecast, but given RBNZ Wheeler’s warnings, a miss could stir bears.

GoldClimbs a Fourth Day, Focus Shifts from Euro Risk to Stimulus
A slow return of systemic risk in the Eurozone. The possibility that the BoJ and BoE are on the cusp of new swells in stimulus. Concern that the Fed may lay out its exit plan. There is a lot going on for gold. The fourth consecutive advance for the precious metal is riding on the Cyprus news. Yet, top concern Wednesday is what the Fed does. If there is a rough QE exit time frame, this is another benchmark that will suffer.
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

7:00

EUR

German Producer Prices (MoM)

0.20%

0.80%

1Y Avg. 0.1; High 0.8; Low -0.4.

7:00

EUR

German Producer Prices (YoY)

1.50%

1.70%

Decline in energy costs contribute to slower growth of producer prices