FOREX TREND MONITOR: Dollar Poised To Rebound On FOMC, US GDP

By Ilya Spivak, Currency Strategist

Major Currencies vs. US Dollar (% change)

17 Jan 201 1 21 Jan 201 1

EURUSD : Rates in Focusas ECB’s Trichet Talks Down Outlook

Last week’s impressive Euro rally clearlylooks to have owed to a parallel drop in credit-default swap (CDS)spreads from the currency bloc’s most debt-stricken peripherymember states (the so-called PIIGS, meaning Portugal, Ireland,Italy, Greece and Spain). However, barring any unforeseendevelopments, the absence of scheduled event risk on the sovereignstress front this week may bring the monetary policy outlook backinto focus. On balance, this seems to bode ill for the singlecurrency after ECB President Jean-Claude Trichet backed off from the hawkish rhetoric accompanying the bank’s latest ratedecision in an interview with the Wall Street Journal over theweekend. Preliminary German Consumer PriceIndex figures stand out on the economiccalendar. Euro Zone ConsumerConfidence and M3 MoneySupply figures are also on tap.

Source: Bloomberg

GBPUSD: All Eyes onBank of England Minutes for Policy Clues

Monetary policy expectations remain in focus asGBPUSD continues to track closely with the UK - US Treasury yieldspread. This puts the spotlight on the Bank ofEngland as it publishes minutes from January’sMPC meeting. The dramatic build in priced-in rate hike expectationsfor the year ahead (as tracked by Credit Suisse) suggests traderssee the bank as likely to err on the side of price stability,stepping off the sidelines to raise rates as inflation continues to rise despite the threat that such action would poseto the nascent economic recovery, particularly as thegovernment’s austerity program gains momentum . Indeed, the central bank argued throughout 2010that inflationary pressure was temporary and would subside over themedium term without tightening. Clearly, this has provenwrong, hinting that putting off the issue for much longerthreatens to become a credibility problem. A relatively robustfourth-quarter Gross DomesticProduct reading will only add to the anticipation, withthe annual growth rate set to print above its long-run averagedespite a shallow downtick from the p rior period. With that in mind, traders will be keento parse the meeting minutes for any clues on policymakers’thinking ahead of February’s MPC sit-down, an event made allthe more important given it coincides with the unveiling of an updated quarterly inflationforecast.

Source: Bloomberg

USDJPY : Spotlight Stayson US Yields, FOMC and US GDP on Tap

US Treasury yields remain most prominent in driving Japanese Yen price action, putting the spotlight squarely onthe busy US economic calendar. Needless to say, the FederalReserve monetary policy announcement and thepreliminary fourth-quarter Gross DomesticProduct reading stand out as top-tier eventrisk. For the former, traders will be most concernedwith quantifying policymakers’ “threshold” forreducing or even suspending the second round of quantitative easingbefore its scheduled completion after hints at the existence ofsuch a barrier suddenly emerged in Fed officials’ commentsover recent weeks. Policymakers’ voting pattern ought toprove significant as well as five regional Fed presidents –including the hawkish CharlesPlosser and Richard Fisher – will rotate into active positions onthe rate-setting FOMC. Meanwhile, the GDP is set to show the annualized growth rate jumpedto 3.5 percent, the highest in three quarters. Better yet, theoutcome is expected to driven by the most robust pickup in privateconsumption in four years. This coupled with forecasts calling forstronger readings on ConsumerConfidence , New Home Sales , and Durable GoodsOrders promise to push US yields higher, taking USDJPYalong for the ride.

Source: Bloomberg

USDCAD : US Economic,Earnings Calendars to Guide Price Action

After last week’s Bank of Canada ratedecision deflated the markets’ robust rate hike expectations , the focus seems to have turned to theaccelerating recovery in the US, with USDCAD swiftly rebuilding itscorrelation with the S&P 500 benchmark equity index. This makes sense:Canada sells over 80 percent of its exports to its northernneighbor, making a recovery at home very much contingent on whathappens in the States. This puts the onus on the aforementioned USdata docket as well as a busy earnings calendar, with 128 S&P500 companies set to report results this week.

Source: Bloomberg

AUD USD : GoldCorrelation Hints Aussie Weakness to Continue

The Aussie’ s bearings are best revealed via its clear correlation with gold prices , with the high yielder likely to continue follow ing the yellow metal lower as investors’dominant forecast for the evolution of the global recoveryshift s away bullish and bearish extremes. Gold had thrived on the back of its appeal as a store of value for bulls and bearsalike , with the former camp calling for runaway inflation courtesy of ultra-loose monetary policies while the latterprojected renewed collapse as fiscal stimulus expired. However,investment demand suffered a major setback, with gold ETF holdingsdropping precipitously over re cent weeks. The reversal seems to owe to thecombination of improving US economic data , rising sovereign stress in Europe and loomingslowdown in China amounting to an environment where a back-slide into recession looks unlikely while pointing to a slow and uneven recovery over the years ahead. T he increasingly apparent shift in the markets’ consensus toward this scenario bodes ill for the Aussie much the same as itdoes for gold. Indeed, a protracted recovery hints that major central banks will now get theirchance to catch up as the RBA – until recently the leader inpost-crisis monetary policy normalization – as Glenn Stevensand company look increasingly likely to sit on their han ds for much of the coming year. Thefourth-quarter Consumer PriceIndex report headlines local event risk.

Source: Bloomberg

NZDUSD : RBNZ Rate Decision to Yield Familiar, Dovish Outcome

The rising link between NZDUSD and yieldspreads puts the spotlight squarely the Reserve Bank of NewZealand. The result may yet prove to carry little weight howeverafter last week’s disappointing inflation report and pointedly dovish comments from Prime Minister John Key seemingly dashed any reason to suspect thecentral bank would abandon its accommodative posture.

Source: Bloomberg

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DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/article/fundamental_trends_monitor/2011/01/24/FOREX_TREND_MONITOR_Dollar_Poised_to_Rebound_on_FOMC_US_GDP.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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