Dollar Tests a Fresh Two-Month Low after the FOMC Decision, Looking Ahead to GDP

  • Dollar Tests a Fresh Two-Month Low after the FOMC Decision, Looking Ahead to GDP
  • British Pound Traders Too Optimistic on Rate Implications of BoE Minutes
  • Euro Economic Activity and Inflation Merely a Distraction to Financial Concerns
  • New Zealand Dollar Rallies Despite RBNZ’s Near-Term Dovishness
  • Australian Dollar Eases after Prime Minister Announces a One-Time ‘Flood Levy’
  • Japanese Yen Untroubled by Ballooning Debt Forecasts, What about Growth Updates?


Dollar Tests a Fresh Two-Month Low after the FOMC Decision, Looking Ahead to GDP

The dollar can’t seem to catch a break. The benchmark currency slid for a fourth consecutive day on a trade-weighted basis Wednesday in the wake of a surprising dovish adjustment to the Federal Reserve’s policy statement and strong housing report. And, though the greenback is forging new two-month lows, astute traders are taking note of the decelerating pace of losses tabulated on a daily basis. This is a potential leading indication that the battered currency is primed for a reversal. However, both the instigation of a positive turn and the momentum that backs a subsequent rally is heavily dependent on the fundamental developments going forward. It just so happens, that we have a complicated and potentially volatile landscape ahead of us.

Yet, before diving into the fundamental scenarios ahead of us; it is important to take stoke of the greenback’s current bearings. EURUSD is the most liquid and prominent pair; so its steady three-week march higher cuts the most dramatic posture. Amongst the rest of the majors, though, the dollar will not have to cover much ground before it graduates from technical correction to a genuine bullish reversal. As is often the case, risk appetite trends once again hold the greatest potential for driving the benchmark currency higher. Nevertheless, the S&P 500 (as our barometer for investor sentiment) is stubbornly holding its course as long as the status quo is maintained. There was some chance of shaking risk appetite loose and perhaps leveraging a dollar-specific recovery Wednesday in a change in burdensome stimulus efforts. There was a solid consensus heading into the FOMC’s rate decision that the central bank would maintain its range for benchmark lending rates (between zero and 0.25 percent) as well as its $600 billion stimulus program. Both were ultimately realized; and yet, there was still a dovish aspect to this event. Though the accompanying statement didn’t materially deviate from recent Fed chatter or previous rate decisions; the market was clearly expecting some tangible improvement in the outlook. And, while the central bank did note an improvement in economic activity, they explicitly noted it was not enough to bring down unemployment. Their cautious stance is made exceptionally clear in their retention of the language that rates will be held “exceptionally” low for extended period. This terminology will be dropped well ahead of the eventual hike. Perhaps even more remarkable was the unanimous vote. With Hoenig rotating out of his voting responsibility, there was an expectation that Fed Presidents Plosser and Fisher would pick up the responsibility of pushing forward the hawkish agenda. Neither would speak up.

The sting of a slightly dovish Fed statement won’t hold for very long. Our attention is immediately turning back to Friday’s advanced 4Q GDP reading. Set against the UK’s disappointing growth reading, this indicator will be pressurized in its potential for a dollar impact. That said, the event risk crossing the wires before the growth report will come up short for market impact. Durable goods, pending home sales and the Chicago Fed’s National Activity Index are notable figures; but they don’t have the same clout as the quarterly GDP number.

British Pound Traders Too Optimistic on Rate Implications of BoE Minutes

Following the sterling’s tumble Tuesday; there was a speculative inclination to drive a correction. The reaction to the disappointing GDP figures was genuine and will likely have an influence over the pound for some time; but momentum of this magnitude is oftentimes followed by profit taking and contrarian positioning. It just so happened, that the subsequent correction this time around was encouraged by fundamentals. The minutes from the last BoE rate decision offered a hawkish surprise when it was noted that the vote was 6-2-1 (meaning six members voted for a hold, two for a rate hike and one for a 50 billion pound increase in the bond purchasing program). A second hawk adds credence to a possible rate hike; but it is prudent to remember that this vote was before the GDP data was released. Stalled growth will keep policy stationary.

Euro Economic Activity and Inflation Merely a Distraction to Financial Concerns

Since EU policy officials leaked their proposals for upping the fight against the region’s financial crisis; we have seen little progression on meaningful steps towards this end. What’s more, we see today that an ECB member remarked that confidence in the EFSF was overleveraged while ECB President Trichet backed off the inflation rhetoric. That said, import inflation in Germany hit a 29 year high and the nation’s CPI figures are due in the upcoming session. Along with inflation, we will have a timely reading of economic, business and consumer sentiment.

New Zealand Dollar Rallies Despite RBNZ’s Near-Term Dovishness

Between the US and New Zealand interest rate decisions, the latter had the greater potential for surprise. Indeed, the commentary accompanying the decision to keep the New Zealand benchmark rate at 3.00 percent caught a portion of the market. However, despite Governor Alan Bollard’s suggestions that rates would rise over the coming two years, he would also say that core inflation was “comfortably” positioned within its target band and rates would be held at current levels until the economic recovery was “more robust.” That said, the kiwi still rallied.

Australian Dollar Eases after Prime Minister Announces a One-Time ‘Flood Levy’

Just a short-time ago, an RBA board member remarked that the floods in Queensland could knock a percentage point or more off of growth going forward. However, Prime Minister Gillard is proving more optimistic with an assessment of 0.5 percentage points. On the other hand, the announcement of a ‘one-off’ levy on certain income brackets creates another stunt for growth expectations.

Japanese Yen Untroubled by Ballooning Debt Forecasts, What about Growth Updates?

Wednesday morning, the Finance Ministry released statistics that suggested the nation’s debt sales could top 50 trillion yen by 2013 – well above the current fiscal year’s cap. Furthermore, the group forecasted a revenue shortfall of 51.8 trillion yen in the same period. This is just another reminder of the nation’s longer-term troubles; but it seems nothing short of a strong carry drive can shake this currency to reality.

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January 26th, 2011 in Forex News | tags: Fomc Decision, Gdp, Looking Ahead

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