Forex: Can the Dollar Hold Steady Until the Fed?

Talking Points:

Can the Dollar Hold Steady Until the Fed?
British Pound Surges as Market Sees BoE Bending On Rate Hold
Euro Pairs Next in Line for Event-Driven Volatility

Can the Dollar Hold Steady Until the Fed?
Breakouts are best served by an optimal mix of an unstable technical picture, a fundamental catalyst that can focus the market’s attention and an underlying theme that can maintain momentum after an initial move. The dollar is missing some of these elements. More precisely, their relative timing is off. The dollar is facing breakout pressure on a number of its pairings. EURUSD is being held to an 80-pip range above 1.3500, USDJPY is being held back below 104.75 and GBPUSD is within reach of the year’s 1.6600 high (a dollar-bearish contrast). There is relatively little room for these pairs to move, making a breakout a high probability event. Yet, the docket looks like it would struggle to tap one of the two major fundamental themes that can override speculators’ many preoccupations: general risk trends and a Fed Taper drive. The former has been elusive for some time and market participants know the latter will be defined by next Wednesday’s FOMC decision.

This is not to mean that can’t generate a break for individual pairs or for the dollar in general. Rather, it is far more difficult to establish the kind of break that can develop into a meaningful trend. From the risk perspective, the greenback is finding little appeal for its traditional haven appeal. Yet, this may change in the next 48 hours. The S&P 500 – a traditional barometer for investor sentiment – has worked its way into an extremely tight trading range that has no doubt led traders on both side of the market to place orders for the eventual break. An escalation of risk deleveraging or influx of fresh capital to drive the multi-year long trend beyond 1 to 2 percent move however requires conviction. On the docket, there are a few noteworthy pieces of event risk with this kind of influence ahead. The Chicago Fed’s National Activity index for December, Markit’s January manufacturing activity index and the NAR’s December existing home sales figures are all important economic readings; but are unlikely to distract traders’ attention from next week’s monetary policy decision.

Despite the data’s likely shortfall, a calendar item worth taking note of is the planned auction of 10-year inflation-protected Treasuries (TIPS). The appetite for this asset can measure risk-free demand as well as inflation expectations – a key aspect to the removal of accommodation. Meanwhile, the strongest demand for 1-month notes in two years yesterday may reflect a growing need for ‘cash equivalents’ (safety).

British Pound Surges as Market Sees BoE Bending On Rate Hold
The sterling rallied across the board Wednesday, forcing EURGBP to 12-month lows and nearly driving GBPUSD above the multi-year high set on January 2. The impetus for this move was interest rate expectations (again relative monetary policy showing it is the FX market’s most proactive driver). Traders latched onto data that showed the unemployment rate down to 7.1 percent. For those keeping score, that is 0.1 percentage point above the level which the Bank of England (BoE) had said was its target for considering rate hikes. This is well ahead of the central bank’s schedule and seems to vindicate heavy speculation that a hike will come sometime this year – rather than 2015 as the BoE had projected. The group’s minutes reiterated that hitting the target does not necessitate immediate action. However, at this pace, holding through the rest of the year with the rate below the target would undermine the central bank’s credibility. Either they hike in 2014 or change guidance.

Euro Pairs Next in Line for Event-Driven Volatility
The Pound, Aussie and Loonie pairs were all tremendously active this past session – coerced into action by scheduled event risk. The Euro may prove that news-derived market mover Thursday. Though we have seen the market overlook fundamentally-important headlines so far this week, EURUSD is running in a dwindling range and the growth-related Eurozone PMI figures for January are due. These measures are comprehensive and historically draw the market’s attention. However, fundamental traders should also make note of recent, underlying developments like this past session’s €10 billion sale 10-year Spanish bonds – a record. Speculative appetites have grown extreme…

Yen Crosses Notably Complacent After BoJ Maintains Policy
In contrast to the heavy volatility and speculation that followed the UK event risk this past session, the yen crosses were virtually unmoved by the Bank of Japan’s (BoJ) policy decision. The central bank left its open-ended QE program untouched. While this maintains an unrivaled stimulus effort, the markets have priced in a lot of yen weakness via this channel. If markets fear a QE upgrade isn’t at hand, they may ease up.

Australian Dollar Rally Cools Following Strong Inflation Reaction
It seems the market has looked up further out along the horizon to recognize that the RBA will eventually return to rate hikes. The 4Q CPI reading showed price pressures will make future rate decisions a more difficult decision. Though, in a market where there are definitive steps – Taper, expected BoE hike, promised RBNZ hike – this is considered ‘vague’. The Aussie has given back all of its Wednesday morning gains.

Canadian Dollar Plummets, USDCAD Above 1.1000 on BoC Dovishness
The loonie dropped an astounding 0.9 to 1.7 percent against its major counterparts this past session. The collapse (leading to the biggest USDCAD rally in 7 months) was the result of Bank of Canada’s (BoC) policy decision. Lowered inflation projections, noted benefit in currency depreciation for Canadian exports and concern about foreign demand spelled ‘dovish’ to FX traders.

US Oil Posts Best Close of 2014 on Biggest Rally in 6 Weeks
A 1.8 percent rally from US oil Wednesday represents the market’s biggest one-day advance in six weeks. The rally didn’t generate much in the way of additional volume or open interest via futures market. Looking more closely, the US contracts spread to the UK Brent dropped to a multi-week low, open interest is leveling off at substantial lows and the market is in backwardation for the first time in three-months.

Gold at Risk as Market Dangles Above $1,235
From bulls’ push to overtake $1,250, we now find gold trying to hold its head above recent support seen around $1,235. The prevailing bear trend has reared its head as the greenback has refused to offer the metal alternative appeal and risk trends hold relatively stable. Meanwhile, the CBOE’s Gold Volatility Index jumped from its 9-month low, but didn’t make it beyond 16 percent – its 1-month average is 18.3 percent. **Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:00

AUD

Consumer Inflation Expectation (JAN)

2.1%

Yesterday’s CPI print beat, lending the Aussie some much needed support.

1:45

CNY

HSBC/Markit PMI Manufacturing (JAN)

50.3

50.5

Estimates called for 50.5 last week.