Talking Points:

Dollar Finding Little Support on Risk Trends, Turns to FOMC
Euro Stubbornly Holds Above 1.3900 Through Weak Data
British Pound Drops Amid BoE Updates, Minutes and Data Ahead

Dollar Finding Little Support on Risk Trends, Turns to FOMC
The dollar has been backed into a corner. EURUSD is within reach of 1.4000, GBPUSD is ready to find direction after weeks of sideways price action and AUDUSD has made a technical move for a bullish break. And, to tie this all back to the greenback’s tense position, we find the Dow Jones FXCM Dollar (ticker = USDollar) within a ‘terminal’ congestion pattern that must inevitably end with a break. Traders know it isn’t the initial breakout that matters, but rather the follow through found after the first jolt. That is where the week’s top scheduled event risk comes into play: the FOMC rate decision. With a market feigning a reduced risk profile via volatility measures and equities while doubt gains traction and volume, this is the type of event risk that can elicit more than just a dollar response.

While the Fed policy meetings are generally market-worthy events, this particular gathering carries far more weight than usual. The market’s first evaluation of this event is whether the central bank will keep up the Taper. Referring to Bloomberg’s poll of economists, there is a 96 percent probability that a third $10 billion Taperof the monthly purchases of Treasuries and MBS (to $55 billion) will be announced. The market’s assessment of the odds are likely very close – and there is a general belief that the group will maintain this pace until the stimulus program is fully wound down by December – so the short-term impact on dollar and capital markets may be inherently dampened. That said, conditions supporting ‘risk appetite’ have steadily deteriorated: growth forecasts have cooled, earnings projections lowered, capital inflows pinched, leverage pushed to record levels and market gains coming in shorter bursts. This is the kind of high profile, singular event that the masses can use to ‘recognize’ a fundamental imbalance is properly motivated.

Beyond the initial interest in the Taper, the market will move on to absorb the updated forecasts for growth, inflation and interest rates. Half an hour later, Fed Chair Janet Yellen will hold her first press conference in her new role. These are the areas in this event where dollar traders are more likely draw their bearings. With a mind to any ‘risk’ response to the event; gauging hawkish or dovish lean in forecasts, establishing pace via changes to forward guidance and setting a speculative timeline for the first Fed rate hike will be key for the currency.

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Euro Stubbornly Holds Above 1.3900 Through Weak Data
The euro refuses to give ground against the dollar – and well it should. Without a definitive move from the broader capital market to unwind risky positions (that certainly include growing exposure to periphery Eurozone assets) or motivation for the ECB to curb its balance sheet reductions, the currency will continue to gain structural ground against its benchmark counterpart. This past session, the docket items were unflattering for the currency. The January trade balance for the Eurozone was a small €900 million and the region’s investor confidence survey for the current month dropped sharply from its previous 10 year high. Yet, beyond the data, we learned Portugal successfully bought back bonds; Greece came to a deal with the Troika to release funds; and the latter country planned to sell bonds before May. Status quo favors the euro.

British Pound Drops Amid BoE Updates, Minutes and Data Ahead
With the exception of GBPCAD, the British pound dove this past session. The docket was light for data, but the Bank of England delivered a few important updates. Governor Mark Carney announced a management shakeup that will take effect generally on June 1. It’s unclear whether the changes will materially change the net vote and views of the MPC. Speaking after the release of a report on the central bank’s strategy, Carney remarked that that the low rate environment is conducive to complacency but they don’t plan to “take risks” with the UK economy by tightening too early. This hands-off talk still doesn’t curb speculation of a forward shifted rate hike (at least compared to the Fed and others). The upcoming BoE minutes and February employment statistics will offer us a little more clarity for traders. Dovish headlines could crack 1.6500 GBPUSD.

Japanese Yen Crosses Tepid Risk Performance Suggests BoJ Doubts
Global equities and emerging markets were charging higher while volatility measures shrunk. A broad gauge of ‘risk on’, we should expect the carry interest underlying the yen crosses to leverage their own climb. Yet, the Japanese currency instead gained ground against most. This could speak to sentiment’s shaky health, but more likely it shows the growing doubt over the BoJ’s commitment to drive the yen lower.

Canadian Dollar Slides as BoC Warns Rate Cuts are an Option
The Canadian dollar was the worst performer this past session and diverged sharply from the performance of its fellow investment currency (the Aussie and Kiwi dollars). Rather than take advantage of the yield push, the loonie tumbled on unexpectedly dovish comments from BoC Governor Poloz. While not a preemptive warning, the central banker’s warning that rate cuts were still an option speaks to his fears.

Australian and New Zealand Dollars Gaining Traction – Carry or Risk?
Australian and New Zealand 10-year government bond yields jumped yesterday, bolstering the carry trade appeal of their respective currencies. There are two ways carry currencies like these can leverage their position: general risk appetite build or yield forecasts improve. We are seeing the latter here. That being said, swaps are not driving up forward projections; so this mid-range yield upgrade may not last long.

Emerging Markets: Ukraine Standoff Intensifies, Emerging Market Rights it Off
International tension continues to build over the Ukraine / Crimea situation after reports that Russia recognized the disputed region’s sovereignty and unidentified soldiers gained access to a Crimea military base. With the West vowing sanctions, the risk is that a Russia issue could turn into an emerging market one. Yet that doesn’t seem the worry for traders as the MSCI EM ETF jumped 1.4 percent and the FX group was mixed.

Gold at Risk of Only Second Three-Day Decline of 2014 with Fed Ahead
With risk trends showing improvement (dubious as they may be) and geopolitical tensions doing little to draw panic from the financial system, gold has lost some of its luster as a safe haven and alternative store of wealth. The precious metal dropped a second day – by 0.8 percent – on distinctly lower volume. If the Fed’s maintenance of Taper heartens the dollar today, we may see our second three-day drop of 2014.**Bring the economic calendar to your charts with the DailyFX News App.

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