Talking Points:

Dollar Run Drives EURUSD to Key Support, Next Step Difficult
British Pound, Yields Unable to Rally on Strong Jobs Data
Euro Falls Despite European Capital Market Bounce

Dollar Run Drives EURUSD to Key Support, Next Step Difficult

Despite a limited economic calendar, the US dollar put up an impressive performance this past session. The question is whether the fundamentally-deficient drive can sustain itself. With the Dow Jones FXCM Dollar Index (ticker = USDollar) facing a larger trend reversal and EURUSD stationed at key support of 1.3500, progress would carry a substantial implication of trend development. In an environment of low volatility and tepid trend generation, a rogue move from such a big player is difficult to generate. Therefore, the probability is that either bulls’ conviction flags or a fundamental driver steps in to take the helm.

The more tangible line to follow for scheduled event risk moving forward, are interest rate expectations. This past session, Fed Chair Janet Yellen conducted her second round of testimony before Congress (this time in the House of Representatives). The content of her remarks didn’t change materially from what was said – and insinuated – the first day, yet the performance for currency and yields was more intense. Gauging the market’s rate forecasts, the two-year Treasury yield advanced a third day (to 0.484 percent) and Fed Funds futures saw the curve lifted. Reiteration of an optimistic growth outlook and the suggestion of an ‘exit plan’ for stimulus by yearend reinforces known forecasts rather than illuminates new avenues. With June housing data and St. Louis Fed President Bullard on tap tomorrow, there isn’t much rate fodder.

Another interesting line of question-and-answer in Yellen’s testimony tapped into the dollar’s other typical fundamental driver: the balance of yield reach versus haven and hedge demand. In response to concerns about over-extended capital markets, the central bank head said that she didn’t see markets’ current level as excessive but acknowledged the Fed’s effects in the system and said risks to stability were ‘moderate’. This is far more moderate than Richmond Fed President Fisher’s own remarks Wednesday that prices are “rich” by almost any measure, but it shows a growing appreciation of this important factor. Meanwhile, we’ll watch the FX volatility measures to see if fear will lift the USD again.

British Pound, Yields Unable to Rally on Strong Jobs Data

Pound traders have had two rounds of positive event risk to feather interest rate expectations. And yet, the sterling was unable to mark the critical progress that would see crosses like GBPUSD scale 1.7200 and new multi-year highs. The combination of the bigger-than-expected jump in inflation readings reported Tuesday and the downtick in unemployment rate to a five-and-a-half year low just this past session offers a material improvement in the central bank’s policy focal points. And yet, Gilt (government bond) yields and swaps failed to add buoyancy to rate speculation. Such reservations are a concern for bulls and suggest the markets have already fully priced in the early first rate hike by the BoE. Moving up the time frame may not be enough. The pace of tightening after the first may be new frontier for speculation.

Euro Falls Despite European Capital Market Bounce

Though most FX traders were focused on event risk in other corners of the market, a bullish lean for the US Dollar and British Pound would draw a notable enough contrast to the Euro’s situation to see the currency down. On the docket, the ZEW investor sentiment survey for July showed the outlook for the Eurozone dropped to its lowest level in 11 months while Germany’s own forecast hit a 19-month trough. While still high historically, the measures are sliding dangerously fast. Furthermore, we see the markets themselves are starting to shudder. European equity indexes were down once again and periphery bonds were slowly bleeding as well. As the saying goes, ‘follow the money’.

Canadian Dollar Best Performer after BoC Offers Neutral Policy Stance

The Bank of Canada kept its benchmark lending rate unchanged at 1.00 percent, but what traders were really watching was the tone the group and its Governor Stephen Poloz took on the forecast. Overall, it was conspicuously dovish. The central bank downgraded its 2014 and 2015 GDP forecasts (2.2 and 2.4 percent) and assessed that a recent swell in inflation was transitory. Government bond yields seemed to take the news at face value with the 10-year hitting a 13-month low. And yet, USDCAD finished down on the day.

New Zealand Dollar: Will Tepid Inflation Pressures Cancel Next Rate Hike?

Where the market response to the UK, US and Canadian monetary policy updates over the past 24 hours was either muted or contradictory; the New Zealand Dollar’s reaction to the country’s 2Q CPI release has seen NZDUSD reverse from its multi-decade high close last week. While this is the only major engaged in hikes, concern of a postponed RBNZ move next week may exact a heavy toll on the currency.

US Oil Attempts Bullish Reversal on Heavy Supply-and-Demand Shift

Oil’s fundamental motivations wax and wane with little pattern. This past session though, it seemed traditional supply and demand was taking in the driver’s seat. The weekly US Department of Energy statistics showed a drop in inventories three times the forecast (7.5 million barrels) while implied demand rose to a record (17.1 million barrels/day). Add to that a mild risk appetite run and upgraded Russia sections by the west…

Gold: A Drop in Volume Curbs Bear Trend Without Giving Bulls Hope

Where a rise or fall in volatility has a distinct directional consideration for some markets – like US equities and Yen crosses – gold generally has an agnostic response, losing momentum regardless of our prevailing direction. With volume dropping this past session and the CBOE’s volatility measure holding below 15 percent, this week’s hefty gold tumble below $1,300 stalled. **Bring the economic calendar to your charts with the DailyFX News App.

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