There is very little support for a dollar bullish outlook under current market conditions. However, there may be reason to be less dollar bearish; and even slight improvements in the forecast for a currency at record lows can lead to a significant rebound. For the battered greenback, the top fundamental concern is the outlook for monetary policy. The Federal Reserve has cut its benchmark lending rate 225 basis points since it began its dovish regime in September. This has clearly had a severe impact on sentiment as the dollar has been pushed further and further into record lows; and few trends could keep momentum going at such extreme levels.
[B]
Trading the News: US Consumer Price Index[/B]
[B][U]What’s Expected[/U]
[/B]Time of release: [B]03/14/2008 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact : [B]EURUSD[/B]
Expected: [B]4.3%[/B]
Previous: 4.3%
[B]How To Trade This Event Risk[/B]
There is very little support for a dollar bullish outlook under current market conditions. However, there may be reason to be less dollar bearish; and even slight improvements in the forecast for a currency at record lows can lead to a significant rebound. For the battered greenback, the top fundamental concern is the outlook for monetary policy. The Federal Reserve has cut its benchmark lending rate 225 basis points since it began its dovish regime in September. This has clearly had a severe impact on sentiment as the dollar has been pushed further and further into record lows; and few trends could keep momentum going at such extreme levels. From the monetary policy statements that accompany each rate decision, public addresses by Fed members and Chairman Bernanke’s testimony to congress, we know that the central bank has shifted its focus to faltering economic activity and a struggling financial markets. This has pushed stifling inflation pressures to the background – even though headline and core pressures are well above the group’s target. However, conditions have changed in the past few weeks. Though the outlook for an impending economic contraction has intensified; the Fed may have scope to take a more neutral policy stance. Not only have previous cuts not filtered through the market, but the policy authority recently announced a massive liquidity injection into the credit market, with mortgage-backed securities allowed as collateral. This was an effort aimed specifically at loosening credit markets and may be a replacement for further, deep rate cuts. However, if inflation cools through February, there will be little reason for the Fed not to double up on its efforts and cut another 75bp to try and jumpstart the economy.
Considering how low the US dollar is, a sharp rebound is certainly a strong possibility. However, fundamentals would need to support such a move. For a market that has priced in steady and large rate cuts for the foreseeable future, the catalyst for a sharp rebound from the dollar would have to come from doubt that the Fed will continue as consistently as previously expected. The seeds of such doubt have already been sown with the TSLF, but inflation will need to confirm it. We would consider a 4.6% headline CPI read and 2.7% core CPI read as fulfilling the hawkish push. With a confirmed, positive fundamental release we will look for a five-minute red candle to confirm entry on two lots of EURUSD. Our initial stop will be set at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion (with a mind to major resistance in the vicinity) and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.
On the other hand, with the economy inching closer to a recession and credit conditions worsening, a natural drop in inflation could open the Fed to more cuts and the dollar to further losses. We will follow the same strategy for a short as the long above, just in reverse.
[I]
[/I]
[I]Written by John Kicklighter, Currency Analyst for DailyFX.com[/I]
[I]Have comments or questions on this or other articles authored by John? E-mail him at <[email protected]>.[/I]