• Dollar Recovers All of Tuesday’s Losses but not Through Risk Trends or a Hawkish FOMC Minutes
• British Pound Can’t Find its Footing between a 13 Year High in Unemployment and BoE Minutes
• Euro: Policymakers Hope Market Fear Over Greece has Passed but Situation Worsening
• Japanese Yen: What Should Traders Expect from the Bank of Japan Rate Decision?
Dollar Recovers All of Tuesday’s Losses but not Through Risk Trends or a Hawkish FOMC Minutes
In a dramatic about-face, the US dollar would completely retrace its significantly losses from Tuesday and put itself back on the cusp of a meaningful bullish breakout. This reversal has notably returned the Dollar Index to an 85-level range high that has stalled this year’s overall bull trend for nearly two weeks now. Amongst the majors, EURUSD is back at its nine-month lows at 1.36; while GBPUSD has notably forestalled a jump back above 1.58 and is once again looking to develop the critical range breakout established at the beginning of the month. Given the proximity of significant technical levels and heightened volatility, it may seem that the Dollar is on pace for a critical breakout. However, without a clear fundamental catalyst, it will be difficult to clear such a prominent hurdle. Looking at today’s drive, there was a clear disconnect between the greenback’s significant price action and the prominent developments for the day. Keeping a constant tab on the risk appetite and the dollar’s role as a safe haven currency; there was little correlation between the greenback’s advance and any other notable speculative asset. Most notably, the Dow Jones Industrial Average carved out a tepid 58-point range. Yet, it is important not to grow complacent on stalled sentiment trends. Greece and the European Union’s plan to rescue the nation should conditions threaten its default are still hanging in the air. All that is needed is a souring of risk appetite; and the spotlight will once again be cast on this gapping financial hole. What’s more, under the right conditions or given the necessary push, China’s efforts to slow its own economy and the global endeavor to withdrawal government stimulus can easily leverage the sense of fear in the market.
Turning from the underlying currents of market sentiment to more tangible fundamentals, it may seem that scheduled event risk could claim responsibility for the dollar’s strength. Topping the docket was the late-session release of the FOMC minutes from the January 26th/27th policy meeting. The report certainly contained more than a few highlights that added a hawkish lean to interest rate forecasts. Among the notable remarks was the admission that the central bank needed to reduced its assets “substantially” and several members suggested starting selling assets in the “near future.” In fact, Fed member Plosser said he was not opposed to begin reducing the balance sheet before the group acted on interest rates. Another standout on policy was Hoenig’s dissent on the language of the statement that followed the actual decision last month. The hawk said keeping the language that conditions would “warrant exceptionally low levels of the federal funds rate for an extended period” limited the Board’s flexibility. This is perhaps a good idea considering the market is now interpreting this phrase to mean there is no possibility of hikes in the immediate future; and when the language changes only slightly, the market reaction could be exaggerated. Furthermore, Hoenig apparently believes a hike in the near term would lower the risk of lasting imbalances and inflation. Altogether, this seems a material shift in hawkish sentiment (though it may not be shared by the entire group). Nonetheless, this was not a catalyst for the dollar today given that the gains would come through the European and early US session hours. Looking ahead to the final 48 hours of the trading week, the market’s taste for risk is once again the primary concern. And, this time, overtaking dollar resistance will likely require a heavy draft and high correlation.
Related: Discuss the US Dollar in the DailyFX Forum,
British Pound Can’t Find its Footing between a 13 Year High in Unemployment and BoE Minutes
Like most other currencies and asset classes today, the British pound was a mixed bag. The sterling was able to muster a rally against the Euro but tumbled against the US dollar. For most other pairs, volatility was otherwise unremarkable. It would be easy to assign this lack of direction to the general stability in underlying risk trends; but this particular currency is not particularly sensitive to risk trends nor would such a write off account for the heavy-hitting economic event risk on docket. In the London session, the monthly labor data would deliver a fundamental shock to a market that has recently taken a bullish outlook for an economic recovery in the wake of the fourth quarter GDP figures. According to the national statistics group, jobless claims unexpectedly jumped by 23,500-filings which subsequently boosted the national total to 1.64 million – the highest reading of unemployment since April of 1997. From an economic perspective, it will be a struggle to develop a recovery without the support of the consumer. On the other hand, there was a bullish slant from the Bank of England minutes released at the same time this morning. The Monetary Policy Committee voted unanimously to pause the bond purchasing program at 200 billion pounds at its last meeting on the forecast that inflation would return to the 2 percent target. However, for some central bankers, the decision was finely balanced with some worrying additional purchases could lead to sharp increase in asset prices and inflation.
Related: Discuss the British Pound in the DailyFX Forum, British Pound May Rebound But Trend Bias Favors Losses
Euro: Policymakers Hope Market Fear Over Greece has Passed but Situation Worsening
Given the euro’s stability recently and the general temperament of risk appetite; it may seem that all concerns over a possible Greek default and the EU’s promise to provide concrete steps to rescue the nation should it be needed has been all but forgotten. However, believing this can lead one to grow complacent on a fundamental threat that can easily erupt back to life. A basic assessment of the situation in the Euro Zone suggests that there are few options for the region; and none of them lead to a clean outcome. The nation will suffer a potential extended recession to meet the EU’s deficit rules – a price that many Greeks are not willing to pay. Alternatively, a bailout would weaken the treaty and political stability of the economy while allowing a default would lead to credit problems throughout the region. This is not an issue that will simply disappear.
Related: Discuss the Euro in the DailyFX Forum, Euro Weighed by Growth, Interest Rate and Financial Stability Doubts
Japanese Yen: What Should Traders Expect from the Bank of Japan Rate Decision?
There are a number of fundamental releases scheduled for the Asian session; but the Bank of Japan rate decision is a key one to watch. As it is with most of the G7 banks, the interest in this event is not a change to the benchmark rate but a potential change in extraordinary stimulus efforts and alterations to commentary. Political and economic pressure has increased for an increase to lending facilities.
Related: Discuss the Japanese Yen in the DailyFX Forum,
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: <[email protected]>
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