USD Outloook Hinges On FOMC, Euro Reversal To Gather Pace

By David Song, Currency Analyst

Talking Points

• U.S. Dollar: Flight To Safety Gathers Pace, All Eyes On FOMC
• Euro: ECB Continues To Oppose Greek Haircut, 23.6% Fib In Sight
• British Pound: BoE Softens Dovish Rhetoric, Resistance At 38.2% Fib

U.S. Dollar: Flight To Safety Gathers Pace, All Eyes On FOMC

The greenback extended the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR ) advancing to a fresh weekly high of 9,930, and the reserve currency may continue to recoup the losses from earlier this month as market participants scale back their appetite for risk. As the ongoing turmoil in the world financial system bears down on investor confidence, we should see the dollar continue to benefit from the rise in safe-haven flows, but the near-term outlook for the USD certainly hinges on the FOMC rate decision as market participants weigh the outlook for monetary policy.

Indeed, the more robust in the world’s largest economy will limit the Fed’s scope to push through another large-scale asset purchase program, and we expect the central bank to endorse a wait-and-see approach for 2012 as the risk of a double-dip recession subside. In turn, Fed Chairman Ben Bernanke may paint an improved outlook for the U.S., and we should see these developments prop up the USD as market participants scale back speculation for another round of quantitative easing. However, the central bank head may keep the door open to expand monetary policy further in light of the ongoing weakness in the housing market, and the dollar may struggle to hold its ground should the FOMC float the idea of purchasing mortgage-backed securities (MBS) to stimulate home purchases. As a result, the recent strength in the USD should gather pace as long as the Fed talks down QE3, but the board may sound a bit more cautious as central bank doves Sandra Pianalto, Dennis Lockhart, and John Williams join the committee .

Euro: ECB Continues To Oppose Greek Haircut, 23.6% Fib In Sight

The Euro came under pressure amid the heightening risk of a Greek default and the single currency remains poised to weaken further over the near-term as the fundamental outlook for the region deteriorates. Indeed, the European Central Bank continued to voice its opposition to restructure its Greek bond holdings, while the EU announced it will decide on whether or not to expand the bailout fund in March. As European policy makers struggle to stem the heightening risk for contagion, the EUR/USD appears to have carved out a lower top just ahead of the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, and we anticipate to see another run at the 23.6% Fib around 1.2630-50 as the sovereign debt crisis continues to drag on investor confidence.

British Pound: BoE Softens Dovish Rhetoric, U.K. GDP Disappoints

The British Pound bounced back from overnight low of 1.5528 as the Bank of England struck a less dovish tone for monetary policy, but the sterling remains poised to face additional headwinds over the near-term as the U.K. face an increased risk of slipping back into recession. Although the BoE said additional asset purchases are ‘likely,’ the central bank noted that the risk for inflation is ‘more finely balanced,’ and it looks as though the MPC sees a lower risk of undershooting the 2% target for price growth as policy makers saw ‘some positive’ developments in recent months. In turn, the market reaction to the weaker-than-expected 4Q GDP report was certainly short-lived, and the GBP/USD may continue to work its way towards the 38.2% Fib from the 2009 low to high around 1.5680-1.5700 as the central bank softens its dovish tone for future policy.

--- Written by David Song, Currency Analyst

To contact David , e-mail dsong @dailyfx.com. Follow me on Twitter at @ DavidJSong

To be added to David 's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong @dailyfx.com.

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F X Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	15:00	10:00	Pending Home Sales (MoM) (DEC)	-1.0%	7.3%
USD	15:00	10:00	Pending Home Sales (YoY) (DEC)	--	6.9%
USD	15:00	10:00	House Price Index (MoM) (NOV)	0.0%	-0.2%
USD	15:30	10:30	DOE U.S. Crude Oil Inventories (JAN 20)	1450K	-3438K
USD	15:30	10:30	DOE U.S. Gasoline Inventories (JAN 20)	2000K	3717K
USD	15:30	10:30	DOE U.S. Distillate Inventory (JAN 20)	-125K	438K
EUR	17:00	12:00	French Total Jobseekers Change (DEC)	25.0	29.9
EUR	17:00	12:00	French Total Jobseekers (DEC)	2870.0k	2844.8k
USD	17:30	12:30	Federal Open Market Committee Interest Rate Decision	0.25%	0.25%
NZD	20:00	15:00	Reserve Bank of New Zealand Interest Rate Decision	2.50%	2.50%
NZD	23:00	18:00	RBNZ Governor Alan Bollard Speaks on New Zealand Economy	--	--
NZD	21:30	16:30	Business NZ Performance of Manufacturing Index (DEC)	--	45.7

Currency	GMT	Release	Expected	Actual	Comments
AUD	23:30	Westpac Leading Index (MoM) (NOV)	--	-0.2%	Declines for the fifth time this year.
JPY	23:50	Adjusted Merchandise Trade Balance (Yen) (DEC)	-376.5B	-567.6B	Largest trade deficit since January 2009.
JPY	23:50	Merchandise Trade Balance Total (Yen) (DEC)	-154.9B	-205.1B
JPY	23:50	Merchandise Trade Exports (YoY) (DEC)	-7.4%	-0.8%
JPY	23:50	Merchandise Trade Imports (YoY) (DEC)	8.1%	8.1%
AUD	0:00	DEWR Internet Skilled Vacancies (MoM) (DEC)	--	-1.1%	Declines for the seventh straight month.
AUD	0:30	Consumer Prices Index (QoQ) (4Q)	0.2%	0.0%	Slowest pace of growth since 4Q 2010, but the rise in the core CPI dampens the scope for lower borrowing costs.
AUD	0:30	Consumer Prices Index (YoY) (4Q)	3.3%	3.1%
AUD	0:30	CPI RBA Trimmed Mean (QoQ) (4Q)	0.5%	0.6%
AUD	0:30	CPI RBA Trimmed Mean (YoY) (4Q)	2.4%	2.6%
AUD	0:30	CPI RBA Weighted Median (QoQ) (4Q)	0.5%	0.5%
AUD	0:30	CPI RBA Weighted Median (YoY) (4Q)	2.4%	2.6%
NZD	2:00	Credit Card Spending s.a.(MoM) (DEC)	--	0.9%	Rises for the eighth time in 2011.
NZD	2:00	Credit Card Spending (YoY) (DEC)	--	5.9%
EUR	9:00	German IFO - Expectations (JAN)	99.0	100.9	Marks the highest reading since July.
EUR	9:00	German IFO - Business Climate (JAN)	107.5	108.3
EUR	9:00	German IFO - Current Assessment (JAN)	116.8	116.3
EUR	9:00	Italian Retail Sales s.a. (MoM) (NOV)	-0.2%	-0.3%	Weakens for the ninth time this year.
EUR	9:00	Italian Retail Sales (YoY) (NOV)	-1.5%	-1.8%
GBP	9:30	Gross Domestic Product (QoQ) (4Q A)	-0.1%	-0.2%	Contracts for the first time since 4Q 2010.
GBP	9:30	Gross Domestic Product (YoY) (4Q A)	0.8%	0.8%
GBP	9:30	BBA Loans for House Purchase (DEC)	35000	36171	Highest since May 2010.
GBP	9:30	Index of Services (MoM) (NOV)	0.4%	0.6%	Increases for the seventh time this year.
GBP	9:30	Index of Services (3Mo3M) (NOV)	-0.1%	0.1%
GBP	11:00	CBI Trends Total Orders (JAN)	-23	-16	Highest print since September.
GBP	11:00	CBI Trends Selling Prices (JAN)	3	13
GBP	11:00	CBI Business Optimism (JAN)	--	-25
USD	12:00	MBA Mortgage Applications (JAN 20)	--	-5.0%	Declines for the first time in three weeks.

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