Dollar Breakout Risk High on Fed, But a Trend?

Talking Points:

• Dollar Breakout Risk High on Fed, But a Trend?
• British Pound Undeterred in Rate Hike Hopes After CPI
• Euro Can Sink Further as Rates Drop – Especially if Fed Holds Course

Dollar Breakout Risk High on Fed, But a Trend?

Between narrow trading ranges for the dollar-backed majors and the impending FOMC rate decision, there is substantial breakout risk for the world’s most liquid currency pairings. A lack of room to move is certainly a consideration for volatility, but the true spark in this equation is the influence that the event risk carries. Heading into the Federal Reserve’s scheduled monetary policy decision, the market has already priced in the baseline change of a further $10 billion reduction in the monthly QE purchases to a $35 billion. If it is priced in, it is unlikely to be market moving unless there is a very unlikely hold or acceleration of the Tapering pace. If this were the only dimension to this event, there would be little to fuel speculation in either US rate forecasts (important to the dollar) or unsettle comfort in complacency and leverage (critical to ‘risk trends’). However, there is more to this event…

Besides the Taper decision and the regular monetary policy statement, this central bank meeting will issue new Fed forecasts for interest rates, employment, inflation and growth. And, 30 minutes later, Chairwoman Janet Yellen will preside over her second official press conference. There is significant scope in this event risk to change the consensus forecast for the timing of the first FOMC hike and the subsequent pace of future moves. The economic projections will take a backseat to the interest rate expectations (the infamous ‘blue dots’) as they drill down to the heart of what really matters for funds seeking return and funded on cheap borrowed capital. If there is any shift back or forward in the vote count for members believing the ‘appropriate’ time for the first rate hike – the majority 81 percent see a 2015 turn – it will change the dollar’s first-mover status. But it isn’t just the first move that matters. The pace of tightening over time is far more important to actual returns. As such, the ‘blue dots’ which show the cluster of where each member expects rates to be at the end of each year through 2016 (and the ‘Longer Run’) will provide far more to work with. To see more on this event and the strategy approach see today’s Strategy Video.

British Pound Undeterredin Rate Hike Hopes After CPI

The Bank of England is considered to on one of the most hawkish rate paths amongst the major central banks. Comments from Governor Carney last week suggesting a tightening move may come earlier than many in the market appreciate only furthered expectations and the sterling. The jump in the currency and yields into the end of last week has cooled, but it hasn’t corrected. Given the nearly year-long advance from both, that is not particularly surprising – even for those that believe this outcome is almost or fully priced in at this point. Yet, what is surprising is that there hasn’t even been a modest correction in the wake of a weak inflation data release. The CPI reading cooled to a four-and-a-half year low 1.5 percent this past session – remarkably tepid for a central bank seen so close to that first hike…

Euro Can Sink Further as Rates Drop – Especially if Fed Holds Course

This past session, the Euro docket was offering up an unflattering view of investor sentiment in Germany with the cumulative outlook for the country dropping back to its lowest level since the beginning of 2013. Yet, this isn’t where the market’s interest truly lie. A deeper fundamental cut comes on the party of yields. Three-month Euro rates have tumbled nearly 24 percent in the weeks since the ECB introduced its new stimulus. Higher market rates were an important factor to the currency’s build up. There is plenty of room to drop. And don’t forget risk trends…

New Zealand Dollar Faces Key Event Risk in 1Q GDP Update

When there is a major fundamental release like the FOMC rate decision, even a market as global as Foreign Exchange can show the symptoms of tunnel vision. Kiwi dollar traders should keep their heads up though in the upcoming session as the New Zealand 1Q GDP release is due just hours after the US central bank shoves the markets. Already an important economic update, this indicator will see its impact amplified by the market’s recent rally following last week’s RBNZ hike. Fears of a pause in the policy regime could easily trigger a retracement.

Oil Prices Rally on ISIS Concerns in Iraq, But is $110 Realistic?

We are seeing the world’s energy supply concerns shifting from the Ukraine (still an unresolved situation) to Iraq. A rise in power for the Islamic State in Iraq and Syria (ISIS) is unnerving the West and raises geopolitical tensions as well as oil prices. We have seen US-based WTI rally to within arm’s reach of $108 and UK-favored Brent climb to nearly $115. These are hearty moves and are founded on significant uncertainty. However, to gain further, this skeptical market may need to see supply constraint concerns evolve into real curbs.

Emerging Markets Stumble Ahead of Fed Decision

Despite the general bullish bearing on global equities this past session, Emerging Markets were not so willing to fold into the yield-reach. The MSCI Emerging Market ETF was little changed follow the past week’s correction while the FX players were broadly lower on the day. Among the bigger moves, the Brazilian Real dropped 1.2 percent against the dollar, the South African Rand fell 0.8 percentand the Mexican Peso eased 0.5 percent. Thebreadth of this weakness and lack of data to drive it suggests this asset group is highly attuned to cheap funding.

Gold Maintains Bear Trend as Another Central Bank Weighs Stimulus Withdrawal

Though it was technically a second consecutive daily decline for gold this pas session, the 0.1 percent slide was rather modest. This was especially notable given how substantially the correction was for the precious metal earlier in the session. The outlook for rising rates is a burden for gold which has no utility in the form of yields. If the FOMC offers up a more hawkish tone today, gold may drop back to $1,250.**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

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

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