British Pound Ready for a Breakout on 1Q GDP Release

Talking Points:

• Dollar Traders Count Down Hours to FOMC Decision
• British Pound Ready for a Breakout on 1Q GDP Release
• Euro Slowly Rising Again, Expect Another ECB Threat?

Dollar Traders Count Down Hours to FOMC Decision

Risk trends were mixed on the day and US yields were modestly higher on the day. For the dollar that would translate into a mixed performance Monday. The greenback is waiting on one of two themes – risk trends or yield forecasts – to gain serious momentum and sweep it to its next trend. For the next 24 hours, that singular focus may leave the greenback adrift. Why? Knowing that much more significant event risk is scheduled for Wednesday and Friday, traders will be hesitant to raise the stakes on their bullish or bearish dollar bets when they could find their positions immediately off the market by a FOMC shift, GDP pace change or big surprise in April employment figures. For the best lead in on risk themes watch USDJPY. For rate forecasts, EURUSD is ideal. Meanwhile, remain dubious of the sentiment data’s impact today.

British Pound Ready for a Breakout on 1Q GDP Release

Top event risk honors go to the British pound for the upcoming session. On deck we have the first reading of 1Q GDP. This is an important piece of data from the most basic of interpretations. However, don’t expect the FX market to look at this release for its ability to move the United Kingdom up or down a few steps on the list of the world’s largest economies. Instead, we will be reading this report for its implications for interest rate expectations. The market is essentially ‘pricing in perfection’ for sterling bulls. In other words, we find that the currency’s current pricing reflects approximately the most aggressive scenario for rate forecasts possible given current fundamental conditions. It is difficult to ‘impress’ bulls by upgrading the timetable at this point. Perhaps not even a strong GDP beat may really do it. But a miss when expecting perfection…

Euro Slowly Rising Again, Expect Another ECB Threat?

It is still not clear whether the European Central Bank (ECB) will increase its stimulus efforts – and if so, when. On high alert for any additional threats thrown at the euro, the market would find the central bank didn’t make any overt warnings. This quiet may be shattered quickly, however, if the EURUSD continues on its current course. While the benchmark currency pair has not moved with particular haste, it is nevertheless up for five consecutive trading days through Monday’s close and is slowly but surely closing in on 1.3900. There is no definitive line in the sand for the central bank, but we have seen two clear reactions to moves above 1.3900 in the recent past. We can already see that these threats had little influence to begin with. Perhaps nothing short of actual monetary policy can turn this market back permanently.

Yen Crosses Rise not a Reflection of BoJ Stimulus Hopes

With the exception of the NZDJPY, the yen crosses were uniformly higher on the opening session of the week. Given the mixed bearings for global equities, this particular performance stood out amongst ‘risk’ readings. A surface deep assessment of the performance finds the March retail sales figures were materially better than expected. That said, the pre-Tax hike swell was discounted ahead of time – a consideration that no doubt kept the reins on the Nikkei 225 as much as the yen crosses. When the market isn’t running on risk trends or key data, the tendencyis to make the connection to BoJ expectations. While the central bank is set to meet later this week, there is little expectation amongst the market for an upgrade in the open-ended QE program. The question now is whether QE will be upgraded ever.

New Zealand Dollar Realized Hikes Less Influential Than Cooling Forecast

What kind of strength has the New Zealand dollar leveraged against its major counterparts since the RBNZ began its hawkish monetary policy regime? The kiwi’s best performance after 50 basis points worth of hikes – no other major central bank is even close to hikes – is a 0.9 percent advance against the Swiss Franc. The ‘high-yielding currency’ is down against the Aussie, pound, Canadian dollar and Japanese yen since the hawkish regime began. We again are witnessing the power of central bank communication. Having advanced after Governor Wheeler first voiced his vow to lift rates by 225 bps over the span of 9 quarters at the end of 2013, it has become difficult to impress bulls. In fact, we find that some level of disappointing is starting to seep in. Rate expectations may have been too forward leaning – expectations of consistent rate hikes – as 10-year yields have tumbled to 8-month lows and swaps are now pricing in less than 100 bps of hikes in 12 months.

Chinese Yuan’s First Gain in Seven Days Not Enough to Turn Trend

What is the Chinese Yuan following: economic data; risk trends; emerging markets or the PBoC fix? The docket opened the week with a better than expected 10.1 percent increase in Chinese industrial profits in the year through March – though this move did not itself present a meaningful trend. Risk trends and emerging markets were mixed rather maintaining a material bearing. The PBoC set a midpoint on USDCNY at 6.1556 versus the previous day’s 6.1565 fix. Looking at the offshore exchange rate (USDCNH) though, the market does not seem anxious to reverse the heavy three-month drop for the Chinese currency (rally for the pair). Risk trends and the US data ahead will help catalyze.

Emerging Markets Currencies Lean Higher, Sovereign Debt Eases

The Emerging Markets have put in for a modestly bullish performance to start the week. From the group’s capital markets, we find the MSCI ETF rose 0.5 percent – the best performance since before the holiday liquidity drain – while sovereign debt measures eased modestly. The biggest story from Emerging Markets through the weekend and into the opening trading day was the escalation of conflict in Eastern Ukraine. In response to the increase in violence, international economic powers are increasing their sanctions on Russia – who they see as an instigator. Russian authorities have warned the sanctions could tip Russia into recession, and the country has seen its sovereign rating downgraded to near ‘Junk’ level. Yet, the Ruble still rose 0.5 percent and default swap premiums dropped 6.6 percent this past session.

Gold Retreats as Ukrainian Crisis Spread Fears Ebb

The first drop in four trading day for gold didn’t seem to fit the fundamental profile of the day. The weekend would see the Ukrainian tensions build and fresh Russian sanctions add to global tensions. Yet, a rebound in basic risk trend measures (US equities) and a mixed view for the US dollar curbed the appetite for an alternative like the precious metal. For speculative appetites, bulls took note of the first increase in net long speculative futures holdings via the COT in five weeks. However, open interest and futures for futures and ETFs reflect a timelier dampener on bulls’ interests. Watch out for volatility ahead. UK GDP will shape BoE rate forecasts and then US data will take it up Wednesday.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

INTRA-DAY PROBABILITY BANDS 18:00 GMT

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email [email protected]. Follow me on twitter at http://www.twitter.com/JohnKicklighter

Sign up for John’s email distribution list, here.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.