All Eyes On Fed Amid Hopes US Recovery Can Offset Global Headwinds

By Ilya Spivak, Currency Strategist

MajorCurrencies vs. US Dollar (%change)

15 Apr 2012 – 20 Apr 2012

Talking Points
  • All Eyes on Fed Policy Decision on Hopes US Can Offset Global Headwinds
  • Soft Patch in US Economic Data May Reflect Catch-Up in Consensus Outlook
  • Japanese Yen, Euro Likely to Underperform if FOMC Reveals Fed Optimism
  • Australian Dollar to Lag Commodity Bloc Counterparts on RBA Rate Cut Bets
  • British Pound Focused on BOE QE Prospects, Q1 GDP Report in the Spotlight

The central theme driving financial marketsremains the extent to which a recession in the Eurozone and relatedslowdown in China will hurt overall global output as well as thedegree to which a stronger recovery in the US can offset theseheadwinds. Traders were dutifully reminded of the dangers afterHSBC reported that China’smanufacturing activity shrank for athird month in April while the preliminary set of EurozonePMI readings for the same period revealed factory- and service-sector performance that was vastly worse than expected . The focus now turns to the Federal Reservemonetary policy announcement due on Wednesday for an update on the otherside of the equation.

US economic data has increasingly to outperform relative to expectations since the last sit-down of the policy-setting FOMC committee (according to data from Citigroup). This may signal that the pace of recovery is once again faltering after a strong start to the year, replaying similar scenarios in 2010 and 2011. Alternatively, it may reflect a catch-up in economists’ expectations for US growth amid signs of genuine acceleration. A survey of analysts polled by Bloomberg hints the latter may indeed be the case. The median forecast for 2012 US GDP growth rose from 2.2 to 2.3 percent since the last Fed meeting, with upgraded expectations for the first, second and third quarters.

If the recovery is indeed gaining momentum, Ben Bernanke and company ought to keep the policy mix unchanged. Indeed, there seems to be little reason to change an approach that’s finally showing signs of working. The more market-moving component of the outing is likely to be found in the updated set of future interest rate projections from individual FOMC members. Traders will be keen to see if any policymakers now expect rates to rise earlier than the official late-2014 time frame. Changes in forecasts for key metrics including GDP growth, unemployment and inflation will also merit attention, particularly if the overall balance reflects an upgrade in the economy’s prospects. Bernanke’s post-announcement press conference may likewise spark volatility in the event that any of the Chairman’s remarks catch the markets off-guard.

On balance, the revelation of a comparativelyoptimistic Fed is likely to see the US Dollar rise againstcurrencies where the yield outlook is materially less robust,particularly the Japanese Yen (where USDJPY continues to track 10-yearTreasury yields). The possibility of additional stimulus atthe Bank of Japan rate decision on Friday as it struggles to gaintraction toward its 1 percent inflation target would Yen weakness.The Euro is also likely to renew its drive lower,although correlation studies point a stalemate between ratesexpectations and risk trends as drivers of price action, meaningdirectional momentum may be somewhat subdued.

The implications of an upbeat FOMC forgrowth-linked currencies are a bit mixed in that a stronger USrecovery would be supportive for risk appetite. We suspectthe Canadian and New ZealandDollar will broadly hold recent ranges as recedingfears of further USD dilution clash with moderation in globalslowdown fears. A non-event RBNZ ratedecision later in the day is likely to reinforce thisdynamic. By contrast, the AustralianDollar is likely to find itself under pressure howeveras rate cut expectations build in the wake of a dismal first-quarter CPI print .

The British Pound largely stands apart from sentiment trends tofocus on domestic policy following last week’s surprisingly hawkish BOE meeting minutes and strong set of good economic data ( CPI , jobs , retail sales ) . This puts the first-quarter UK GDP report at center stage. Expectations call for a 0.1percent increase after output shrank in the previous period. Thiswould avoid a technical recession and reinforce the diminishingprobability of another expansion of QE at May’s BOE policymeeting, driving Sterling higher. Needless to say a disappointingoutcome would produce the opposite result.

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/2012/04/24/All_Eyes_on_Fed_Amid_Hopes_US_Recovery_Can_Offset_Global_Headwinds.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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