Talking Points:

Dollar: The Fed’s Favored Inflation Reading Due
British Pound at Risk of Retreat if BoE Makes Moves on Financial Stability
Yen Crosses Weigh CPI Impact on QE Hopes Versus Influence of Risk Trends

Dollar: The Fed’s Favored Inflation Reading Due

As quickly as the Dollar’s gains were tallied, they were quickly retraced this past session. Without a convincing argument for capital to move to the US and its currency – say an appeal for safety or a competitive yield outlook – a volatile move in the greenback’s favor will be quickly smothered. From the Dow Jones FXCM Dollar Index (ticker = USDollar), the 0.2 percent retreat virtually offset Tuesday’s rally before it could gain traction for a lasting move. In this retreat, the benchmark lost ground against all but the British Pound – the session’s worst performer. Notably, both EURUSD and USDJPY put in noteworthy anti-dollar breaks; though they were more technical than systemic. EURUSD’s move above 1.3625 and USDJPY’s drop below 101.75 lost momentum almost immediately after the breaks were achieved. Though the market is reticent about feeding a strong dollar bull run, it is proving equally dubious of a lasting selloff.

From the newswires this past session, the focus was on high-profile scheduled event risk. Though it was a second revision – most of the market-moving impact for updated indicator series is spent on the initial release – the 1Q GDP update generated extravagant headlines. The 2.9 percent annualized contraction for the world’s largest economy was materially worse than the 1.0 percent slump initially reported and well below the 1.8 percent drop expected of the update. Yet, the markets have been pacified on this update thanks to Fed officials amongst others. Constant reassurance that this was a weather-related one-off for the opening quarter, confidence of a quick rebound has already taken root.

In the forthcoming session, the focus will shift away from the theme of impotent growth interests to far more capable interest rate speculation. Two Fed officials are set to speak on economic activity and monetary policy – Lacker and Bullard respectively – but there will be something more tangible for yield interests to gain traction on. At the press conference that followed the FOMC rate decision last week, Fed Chairwoman Yellen reminded the market that the central bank’s preferred inflation measure is the PCE – not the CPI. This was in response to a question of whether the bank was afraid of being behind the ball. The headline PCE reading is expected to tick up to a 1.8 percent pace while the core reading is seen rising to 1.5 percent. If the jump is bigger, speculative of a more timely rate hike will lift the dollar.

British Pound at Risk of Retreat if BoE Makes Moves on Financial Stability

Testimony from Bank of England officials earlier this week (Tuesday) sabotaged the GBPUSD’s rally and pulled the pair back below 1.7000. The dovish and cautious view issued up by the policymakers at that event deflated the driver that has contributed the most to the sterling’s rally over the past 12 months: rate expectations. We will have a ‘round 2’ on this theme in the upcoming session. The BoE is set to release its Financial Stability Report with recommendations and a speech from Governor Carney accompanying the update. Recently central bank and government have voiced concern of a housing market bubble. If they move to temper this risk, it could deflate early rate hike hopes.

Yen Crosses Weigh CPI Impact on QE Hopes Versus Influence of Risk Trends

How susceptible are markets to changes in speculation over the Bank of Japan’s QE plans? Furthermore, how much impact would a shift have on the yen itself? It is very difficult to muster a meaningful change in the forecast for the central bank to maintain course on its open-ended QQE program thanks to officials’ repeated efforts to play down upgrade hopes (something that could have driven the yen crosses even higher). If there is any hope of a change in this status quo stance, it will have to come from the data on deck: Japanese CPI and employment.

Euro Break High Against Dollar Carries Limited Fundamental Banking

The Euro boldly attempted to turn the tide on its past seven week bear trend versus the US Dollar. Yet, that effort fell apart rather quickly after making a technical push above 1.3625 as the shared currency’s fundamental backdrop has bulls balking. Event risk from the Eurozone this past session was tepid, so there was little to alter the course on the yield drain for the region. One material positive is the drop in short-term periphery (Spain, Italy, etc) sovereign yields as a sign of risk appetite. However, this is a mature capital flow. The Euro needs more to continue higher.

Chinese Yuan Struggles to Gain as Business Confidence Cools and Markets Open

We are receiving mixed signals on China – both through fundamentals and markets. This past session a PBoC survey reported local banker confidence dropped sharply in 2Q. Alternatively, the rate of growth in local debt reportedly cooled which takes the edge off a bubble. From the market’s the Renminbi (Yuan) has turned to congestion while the iShares China ETF has dropped over 4 percent this past week.

Emerging Markets Capital Markets Drop, Currencies Fare Better

The MSCI Emerging Market ETF gapped down Wednesday to a three-week low. The move threatens to turn a multi-month bull trend for the capital market measure for the risky segment, but FX doesn’t seem to show the same level of risk. The EM currencies were split this past session with the more liquid BRIC units extending general bull trends. High yield appetite is being easily fed by moderate liquidity.

Gold: Activity Doldrums Can Anchor Metal as Much as Financial Assets

We know what impact low activity has on most financial assets: smaller swings see speculative appetites dry up. That same reality seems to be infecting gold. Volume in both metal futures and ETFs are trending lower as traders accept the lethargy of quiet market conditions. This can be a killer for assets that require speculative demand to feed a trend. And, given the lack of inflation and anti-currency sentiment, it is hitting gold.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

1:30

AUD

Job Vacancies (MAY)

2.6%

A second tier employment report

6:45

EUR

French Consumer Confidence (JUN)

Germany sentiment recently jumped