Dollar Torn Between Fed Policy Cues from US Data, Bank Earnings

The Dollar faces a tough balancing act into the week-end as earnings reports from two key US banks and the day’s economic data set offer conflicting Fed policy clues.

Talking Points

Euro Unlikely to Find Lasting Momentum in Industrial Production Data
Strong US PPI, Consumer Confidence Data May Rekindle Fed “Taper” Bets
JPMorgan, Wells Fargo May Sound Alarm on Rates Jump in Q2 Guidance

Eurozone Industrial Production figures headline a lackluster economic calendar on tap in European hours. Expectations call for a 0.3 percent decline in May, marking the worst outcome in four months. Relative monetary policy expectations remain a key driver of Euro price action, so a soft outcome may weigh on the single currency by reinforcing the recent dovish turn at the ECB.

Meaningful follow-through is unlikely however as the focus remains on the Federal Reserve side of the comparative monetary policy debate. With that in mind, US PPI data and the University of Michigan Consumer Confidence gauge are likely to be more significant drivers of price action.

Wholesale inflation is expected to accelerate, putting the year-on-year rate at an eight-month high of 2.1 percent. Meanwhile, the UofM sentiment index is expected to hit the highest level in 6 years. Strong results may rekindle bets on a cutback in Fed asset purchases, particularly as investors realize this week’s heavily scrutinized Bernanke commentary did not amount to an about-face on policy. Such an outcome may offer a lifeline to the US Dollar after two days of aggressive selling.

On the corporate earnings front, second-quarter reports from JPMorgan Chase and Wells Fargo are on tap. Forex traders will be keen to size up the lenders’ forward guidance vis-à-vis the recent jump in bond yields amid QE drawdown speculation. Signs of unease about the implications of a reduction in asset purchases on lending activity may countervail “pro-taper” cues from the US economic data set, keeping a lid on any significant recovery in the greenback.

The major currencies drifted sideways overnight as an absence of top-tier scheduled event risk allowed the markets to digest the preceding day’s volatility. The New Zealand Dollar narrowly outperformed, rising as much as 0.4 percent against its top counterparts.

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