Forex Analysis: US Dollar Eye On FOMC: New Cast, New Policy?

OPEN

HIGH

LOW

LAST PRICE

CHANGE (%)

USDOLLAR Index

10174.94

10185.45

10147.65

10152.07

-0.3240

EURUSD Curncy

1.3456

1.3497

1.3414

1.3492

0.2675

GBPUSD Curncy

1.5695

1.5773

1.5686

1.5759

0.4078

USDJPY Curncy

90.86

91.02

90.33

90.66

-0.2201

AUDUSD Curncy

1.0418

1.0471

1.0406

1.0464

0.4415

Prices were taken at 19:35 GMT.

In the past session, the US Consumer Confidence hit the lowest level since November 2011 as Americans curbed spending due to higher payroll tax. The Dow Jones FXCM Dollar Index changed little after the report. Despite the substantial shift, it was particularly difficult for the data to generate strong dollar waves with the level of event risk on deck for the upcoming session. The FOMC rate decision and US Q4 GDP report scheduled for the US session tomorrow tap into deeper concerns for dollar traders. There is heavy debate amongst traders as to when the Fed’s quantitative easing program will slow or come to an end alongside evidence that the US economy is improving gradually with sustained recovery in employment trends and housing markets. The Fed, though, with new voters is less likely to stop its asset buying within the first half year of 2013.

Ultimately, despite of the bullish data and resolution of the fiscal cliff, the US economy is still far from meeting the Fed’s conditions for concluding monetary stimulus. The current unemployment rate is 7.8 percent and expected to only slowly recover from this level. That leaves considerable time to once again reach the Fed’s target jobless rate of 6.5 percent. Second, the improvements in hiring and home sales recently suggests that US economy positively reacts to the monetary stimulus – perhaps encouraging this support to be held in place for longer.

The other top driver for the Dollar Index tomorrow, 4Q expected to report a much slower 1.2 percent pace compared to the 3.1 percent reading in the 3Q.. If the reading comes out better than expected, it will be difficult to gauge the greenback’s move. There is a distinct safe haven value to the dollar, which can be undermined by strong growth readings from the world’s largest economy. On the other hand, relative growth may carry more weight in the global markets.

In today’s session the dollar was lower against all the majors measured in the Dollar Index. Most notably, the EURUSD broke to fresh 11-month highs. Yet, the Euro zone still faces fundamental problems such as the unsolved debt crisis. According to the IMF, the euro area economy will shrink by 0.2 percent in 2013. Thus concerns on the gap between financial-market optimism and economy reality may pull the euro back from its current peak. Tomorrow, forex traders may also weigh in on the Euro zone Consumer confidence statistics to adjust their short-term EURUSD bearings.

Economic Calendar

Date

Time

Currency

Event

Importance

Forecast

Tue Jan 29