US Dollar Correction May Extend on Supportive Fed Rhetoric

The US Dollar may extend an overnight recovery following yesterday’s sharp selloff as comments from Fed officials rekindle QE3 reduction expectations.

Talking Points

US Dollar May Bounce as Fed-speak Reboots QE Reduction Bets
Aussie, NZ Dollars Correct Sharply Lower After Yesterday’s Gains

The US Dollar mounted a spirited recovery in overnight trade, adding as much as 0.4 percent on average against its leading counterparts. The move appears to be a retracement in the context of yesterday’s aggressive selloff, which yielded the largest single-day decline in close to a year. This followed a dismal ISM Manufacturing print that weighed against Federal Reserve QE reduction bets, sending the greenback lower and offering a boost to risk appetite.

Looking ahead, a quiet economic data docket in European and US trading hours puts the spotlight on scheduled commentary from Federal Reserve policymakers Esther George and Sarah Bloom Raskin. Both are current members of the rate-setting FOMC and traders will be keen to parse their commentary as expectations for a tapering of QE asset purchases continue to evolve. Between Ms. George and Ms. Bloom Raskin, the rhetoric on offer is likely to fall on the neutral-to-hawkish side of the policy spectrum. That may weigh on sentiment and further support the US unit. Technical positioning points to a broader bearish outlook however.

The Australian Dollar and New Zealand Dollar took a beating in Asia having outperformed over the preceding 24 hours, underscoring the corrective nature of Asia-session price action. Indeed, the key bit of event risk on the day – the RBA interest rate decision – didn’t produce adiscretely significant response from price action. The Japanese Yen likewise came under selling pressure as the Nikkei 225 stock index mounted a sharp rebound, weighing on the local haven unit. Japan’s equities benchmark added over 2 percent, putting in for the strongest single-day performance in close to a month.

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