Talking Points:

Dollar Rally Comes to a Halt as CPI Benchmarks Fed Rate Outlook
Euro Traders Look to See Whether 1Q GDP and CPI Data Will Turn Stimulus Tide
Pound Tumbles Despite BoE Caving to Hawkish Pressure

Dollar Rally Comes to a Halt as CPI Benchmarks Fed Rate Outlook

With the Dollar slipping below 1.3750 versus the Euro, testing 1.6750-resistance versus the Pound and USDollar standing at the threshold of its 2014 bearish channel ceiling; the market is taking the temperature on conviction. If the greenback progresses further with this past week’s rally, a correction could take a big step towards a trend reversal; and a bear trend could be permanently turned on its head. The upcoming docket seems well equipped to make the decision on the currency’s bearings as it taps into the one of the most proactive fundamental themes in the global financial markets: relative monetary policy expectations. Yet, Wednesday’s pause show there is still cause for doubt and perhaps concern. Looking to the Treasury market, yields on the 2-year (a more optimal gauge for the opening shift to a Fed rate hike regime) to the speculative favorite 10-year note were markedly lower – the latter plunging levels not seen in 7-months.

The slump in rates may be a sign that speculative for the FOMC’s return to a hawkish regime is being pushed back, but it may also reflect a nascent appetite for ‘safe haven’ assets with the S&P 500’s fumble this past session. Today’s data may resolve the uncertainty. In a deluge of releases, the CPI measures for April and TIC flows for March stand out. Though somewhat ‘stale’, the TIC report gives an important measure of capital flow into or out of the economy. This is a particularly important assessment as the market focuses on ‘scramble for yield’ and relative policy schemes. However, the best measure for taping into the rate outlook is the consumer inflation report. This represents one of the Fed’s dual mandates (stable inflation and full employment) and is generally the component that will eventually determine the need for policy tightening. The bar is already set high with the consensus calling for a 2.0 percent pace – which would match the fasts pace since October 2012. Missing this target would not likely materially diminish a mid-2015 hike time frame. But beating it could move it forward…

Analysts will cover the release of CPI today. Find out what live events and webinars are scheduled in DailyFX for this week!

Euro Traders Look to See Whether 1Q GDP and CPI Data Will Turn Stimulus Tide

The momentum for sentiment behind the ECB’s change in tack is proving substantial. Last week’s immediate response was volatile, but the weight of the threats to potentially push forward new accommodative steps in June further carried EURUSD through the technical boundary of its nearly two year bull trend. Though the threat was there, the motivation to take action against deflation, lingering growth troubles and a rising exchange rate wasn’t considered serious until that fateful moment. Between now and the June 5 central bank meeting, all important data will be assimilated into assessments for whether the central bank will move or not. A big update to this balance comes today. The 1Q GDP readings are of exceptional import . However, the region’ s CPI reading and the ECB’s monthly report should not be overlooked.

Pound Tumbles Despite BoE Caving to Hawkish Pressure

When ‘pricing in perfection’, the chances of missing the mark are very high. That is what happened to the Pound when traders absorbed the Bank of England’s Quarterly Inflation report this past session. Generally, the central bank was optimistic with an economic forecast for 2014 projected at 3.4 percent and three-year unemployment projection between 5.25 and 5.75 percent. BoE Governor Carney even remarked that the economy was moving closer to the point where a rate hike would be necessary. Starting from neutral, that would have been a big jump for the pound. However, the moderate tone would dampen hawkish expectations for a hike in the final months of 2014 or opening of 2015.

Japanese Yen: Hopes of a July Stimulus Upgrade Fade Further after GDP

There are two catalysts that can drive the Yen crosses lower: risk aversion and an unwinding of BoJ-intervention premium. The former would be a proactive catalyst, but we could be waiting a while if our trades were dependent on the theme. Despite the central bank’s efforts to talk down expectations of further stimulus upgrades at its April meeting, there is still considerable premium behind this hope keeping these pairs buoyant. This morning’s 1Q GDP jump (5.9 percent) materially reduces the need for greater intervention. Kuroda reinforced that sentiment in testimony.

Chinese Yuan: Authorities Send Mixed Messages to Market

The Chinese offshore Renminbi (CNH) was up a second day against the dollar, but momentum is still falling short of the requisite shift in momentum for speculators. Recently, both the IMF and OECD warned that a further downgrade in growth forecasts could be ahead. Recognizing the pain, the PBOC reportedly called on China’s banks to increasing lending – a mixed message for a credit cleanup.

Emerging Markets: Ruble Looks for First 5-Day Run in 8 Months

The retreat for the S&P 500 and indecision for global equities didn’t seem to dampen the appetite for Emerging Markets as a risk exposure. The MSCI EM ETF rose a third consecutive session (0.7 percent to 42.78) and the Bloomberg EM Sovereign Bond Index is 0.3 percent below its record high. While we have seen a variance in demand for different ‘risk’ assets, it is nevertheless diminishes potential when they are so divergent. For the FX set, the Russian Ruble advanced a fourth day as Putin warned against a Ukraine vote amid a possible civil war.

Gold Advance Above $1,300 Has Few Disciples Just Yet

For the technically-inclined, gold’s close above $1,300 was a ‘breakout’. However, the follow through on such a move is generally defined by the fundamental pressure backing the move…or holding it back. The softer tone from the BoE and the drop in US Treasury yields offered gold bugs a little traction. If the metal wants to make a genuine run of it, a reinforced ECB stimulus move next month via GDP figures and a significantly softer US CPI reading (and thereby deferred Fed hike) would do very well to charge a move.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

5:00

JPY

Consumer Confidence Index

37.50