USD Outlook Hinges On Bernanke Testimony, Euro Carves Lower Top

By David Song, Currency Analyst

Talking Points

• U.S. Dollar: All Eyes On Chairman Bernanke, NFPs To Come Into Focus
• Euro: Carves Out Lower Top, Greece Seeks Another EUR 15B
• British Pound: Maintains Upward Trending Channel, BoE To Ease Further

U.S. Dollar: All Eyes On Chairman Bernanke, NFPs To Come Into Focus

The greenback pared the sharp decline from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR ) advancing to a high of 9,738, and the rebound may turn into a larger correction should Fed Chairman Ben Bernanke talk down speculation for another large-scale asset purchase program. As the central bank head is scheduled to testify in front of the House Budget Committee at 15:00 GMT, comments from Mr. Bernanke will heavily influence the USD, and we may see the chairman strike a more balanced tone for the economy as the recovery gradually gathers pace.

As the risk of a double-dip recession subsides, we should see the central bank head to endorse a wait-and-see approach for 2012, and the developments coming out of the testimony may prop up the dollar as market participants scale back expectations for QE3. However, market volatility may thin ahead of the highly anticipated Non-Farm Payrolls report as we’re expecting to see another 145K rise in employment, but the jobless rate may tell a different story as discouraged workers continue to leave the labor force. Nevertheless, as the USDOLLAR trades back above the 38.2% Fibonacci retracement around 9,710, we may see the index threaten the downward trending channel carried over from the previous month, and the reserve currency should work its way back towards the 50.0% Fib around 9,830 as long Fed Chairman Bernanke strikes a less dovish tone for monetary policy.

Euro: Carves Out Lower Top, Greece Seeks Another EUR 15B

The Euro slipped to an overnight low of 1.3084 amid the shift away from risk-taking behavior, and the single currency may weaken further over the remainder of the week as the Greek impasse drags on market sentiment. At the same time, an EU official warned that Greek needs an additional EUR 15B beyond the string of bailouts seen thus far, and the heightening risk of a default casts a bearish outlook for the single currency as European policy makers struggle to stem the risk for contagion. As the EUR/USD struggles to hold above the 38.2% Fib from the 2009 high to the 2010 low around 1.3100, the pair appears to have carved out a lower top this week, and the exchange rate looks poised to work its way back towards the 23.6% Fib around 1.2630-50 as the exchange rate breaks out of the upward trending channel from the previous year. To strengthen our view, we will be watching for a close below the 10-Day SMA at 1.3090, and the single currency remains poised to face additional headwinds in 2012 as the fundamental outlook for the euro-area turns increasingly bleak.

British Pound: Maintains Upward Trending Channel, BoE To Ease Further

The British Pound gave back the overnight advance to 1.5857, but the recent weakness is likely to be short-lived as the GBP/USD maintains the upward trending channel carried over from the previous month. However, Bank of England board member Adam Posen held a dovish tone for the region as he expects inflation to slow further this year, and we may see the sterling come under pressure ahead of the next BoE interest rate decision on February 9 as market participants see the central bank expanding its asset purchase program beyond the GBP 275B target to GBP 325B. In turn, we may see the bullish momentum underlining the British Pound give way, and the exchange rate may come up against the 38.2% Fib retracement from the 2009 low to high around 1.5680-1.5700 to test for support.

--- Written by David Song, Currency Analyst

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

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F X Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	15:00	10:00	Fed Chairman Ben Bernanke Testifies Before House Committee	--	--

Currency	GMT	Release	Expected	Actual	Comments
NZD	0:00	ANZ Commodity Price (JAN)	--	1.2%	Rises for the first time since May.
AUD	0:30	Building Approvals (MoM) (DEC)	2.0%	-1.0%	Contracts for the eighth time in 2011.
AUD	0:30	Building Approvals (YoY) (DEC)	-22.1%	-24.5%
AUD	0:30	Trade Balance (Australian dollar) (DEC)	1200M	1709M	Largest surplus since September.
CHF	7:00	Trade Balance (Swiss franc) (DEC)	2.50B	2.07B	Smallest surplus since September.
CHF	7:00	Exports (MoM) (DEC)	--	6.1%
CHF	7:00	Imports (MoM) (DEC)	--	7.6%
GBP	9:30	Purchasing Manager Index Construction (JAN)	52.5	51.4	Slowest pace of growth in four months.
EUR	10:00	Euro-Zone Producer Price Index (MoM) (DEC)	-0.1%	-0.2%	Slowest pace of growth since October 2010.
EUR	10:00	Euro-Zone Producer Price Index (YoY) (DEC)	4.3%	4.3%
USD	12:30	Challenger Job Cuts (YoY) (JAN)	--	38.9%	Largest rise since September.
USD	13:30	Non-Farm Productivity (4Q P)	0.8%	0.7%	Expands for the second quarter.
USD	13:30	Unit Labor Costs (4Q P)	0.8%	1.2%	Rises for the first time since the first quarter.
USD	13:30	Initial Jobless Claims (JAN 28)	375K	367K	Below 400K for third week.
USD	13:30	Continuing Claims (JAN 21)	3548K	3437K	Lowest since August 2008.

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Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2012/02/02/USD_Outlook_Hinges_On_Bernanke_Testimony_Euro_Carves_Lower_Top.html

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