Dollar Outlook Vs Major Currencies This Week Hinges On FOMC Outcome

By Ilya Spivak, Currency Strategist

MajorCurrencies vs. US Dollar (%change)

05 Mar 12 – 09 Mar 12

Talking Points
  • Euro Re-coupling With Risk Trends as Focus to Eurozone Recession Fallout
  • Japanese Yen Tracking US Yields, All Eyes on FOMC Policy Announcement
  • British Pound Looks to Jobs Report for Clues on Additional QE Potential
  • Comm Dollars at Risk on Global Slowdown Jitters, Fed QE3 Potential Key

With Greek fiasco largely in the rearviewmirror following last week’s successful PSI outing that almost certainly opened the door for thedisbursement of funds through the second EU/IMF bailout package,markets have scope to reappraise the landscape for new catalysts.What they see is unlikely to appear rosy. A widely expectedrecession in the Eurozone – collectively the world’slargest economy – threatens to bring global GDP growth to theweakest since the Great Recession this year. Indeed, Chinalowered its growth target to the lowest since2004 at least in part because of the projected slumpin the currency bloc, the East Asian giant’s largest exportmarket.

Against this backdrop, markets are looking to the US for a counterweight. While this makes US economic news a focal point for price action, its interpretation is likely to be somewhat counter-intuitive. Economists expect the economy to accelerate, with output adding 2.2 percent in 2012 compared with 1.7 percent last year, but this is still relatively anemic compared with the long-term average of 3.3 percent. In this context, good US data is likely to translate into downgraded QE3 expectations and weigh on hopes that stimulus-primed North American recovery will materially offset the slump in Europe.

Needless to say, this puts the spotlight onthe Federal Reservemonetary policy announcement this week. The template for the markets’response dynamics was established following Fed Chairman BenBernanke’s Congressional testi m ony last month. Most potently, the central bankchief said the fall in US unemployment has been“more rapid” than the central bank expected, hinting athird round of asset purchases would not materialize. The downgrade in dovish rhetoric weighed on stock prices while boostingthe US Dollar . Comments from other Fed officials before andafter Bernanke’s testimony seemed to reinforce theChairman’s intent to project a more neutral tone.

If we get more of the same with the FOMCannouncement, a similar response can be expected. The greenback islikely to see outsized gains versus its most sentiment-sensitivecounterparts, the Australian, Canadianand New Zealand Dollars , with decent follow-through expectedconsidering a lack of major domestic event risk on all three frontsthis week. The Japanese Yen is also likely to see a strong response giventhe firm correlation between USDJPY and short-term US yields. Themarkets’ reaction to a handful of other big-ticket USreleases including CPI and PPI data, industrial production figures,and the UofM consumer confidence gauge is likely to follow the toneset by the FOMC outcome.

The Euro too appears to be in the crosshairs as EURUSDrebuilds a correlation with the S&P 500 – a proxy for overall sentiment trends – given centrality of the Eurozonerecession in shaping ECB monetary policy as well as the globaleconomic outlook (and with it, market-wide risk appetite). Thesingle currency may find a bit of offsetting as EU financeministers meet in Brussels however, with the sit-downexpected to conclude in confirmation that Greece will get its aidcash. Meanwhile, the British Pound continues to focus primarily on BOE policyconsiderations, with February’s jobs report at the forefrontas a guide to shaping expectations for additional QE. Still,risk-related volatility is likely to spill over into GBPUSD if itproduces a large one-sided move in the Dollar.

EURO

Source: Bloomberg

BRITISH POUND

Source: Bloomberg

JAPANESE YEN

Source: Bloomberg

CANADIAN DOLLAR

Source: Bloomberg

AUSTRALIAN DOLLAR

Source: Bloomberg

NEW ZEALAND DOLLAR

Source: Bloomberg

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya , e-mail ispivak@dailyfx.com . Follow Ilya on Twitter at @IlyaSpivak

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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/2012/03/13/Dollar_Outlook_vs_Major_Currencies_This_Week_Hinges_on_FOMC_Outcome.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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