Dollar Positioned for a Breakout but Will GDP and the Fed Provide?

Talking Points:

• Dollar Positioned for a Breakout but Will GDP and the Fed Provide?
• Euro Faces its Own Volatility on Stocked Docket
• British Pound Unimpressed by Surge in Mortgage Approvals

Dollar Positioned for a Breakout but Will GDP and the Fed Provide?

It’s an appropriate place to be, heading into such a significant round of event risk. The Dow Jones FXCM Dollar Index (ticker = USDollar) stands just below 10,500 which technical traders will recognize as a meaningful cap on bullish progress from all the way back to last July’s multi-year peak. To progress further, the market is looking to qualify conviction – and there is no better way to assess that sincerity than through two key pieces of event risk: the first 2Q US GDP reading and the FOMC rate decision. In reality, these are not the only high profile US and global items on the calendar. There is a Spanish growth report, Eurozone sentiment surveys, a US ADP jobs report and a Treasury auction of 2-year floating-rate notes that all carry global influence. Yet, to truly unseat the market’s lethargy via investor sentiment trends or changes in US interest rate forecasts, those two particular releases offer the scope to sway the masses.

The growth update is the first of the two events to cross the wires (12:30 GMT or 8:30 local). An unexpected contraction for the economy in the previous quarter leverages the importance of this release and the need to ‘get back on track’. From economist to central banker to investor, the belief is that the lull through the opening period was temporary – weather related – and a strong rebound will be realized through the rest of the year. That confidence is a foundation with which speculative positioning has continued to build and volatility to sink. Yet, what if the data doesn’t live up to that optimism? This report has direct dollar implications, but its greater influence will be through ‘risk trends’.

Alternatively, the Federal Reserve’s monetary policy meeting holds more explicit potential for the US dollar than it does for level of sentiment in the financial system. This is not one of the quarterly meetings that offer updated forecasts or Chairwoman Yellen’s press conference. The interpretation and speculation in this event will be more subtle as it has to be sussed from the monetary policy report. That means traders will be focused on language that can be used to insinuate whether the Fed’s shift from accommodation to rate hikes will happen earlier or later than the place-setter mid-2015. Given the market’s contentedness in ignoring the implications of higher rates on current positions, the focus will hold to yield advantage and therefore the dollar’s bearings. See more analysis on this event risk in today’s Trading Video.

Euro Faces its Own Volatility on Stocked Docket

While the focus is on the US calendar, the Euro has more than its fair share of scheduled event risk. The more headline-friendly update will be the 2Q GDP reading from Spain. The Bank of Spain released its forecast last week, and the official figures often fall pretty close. A little more room for ‘surprise’ comes from the Eurozone sentiment surveys and Germany CPI update for July. These are important data updates that the ECB itself will no doubt monitor to gauge whether its recent policy easing is having the desired effects or whether more needs to be done.

British Pound Unimpressed by Surge in Mortgage Approvals

There is a concern that there may be few policy options for cooling the UK housing boom short of a BoE rate hike. Yet, if the market sees it that way, they didn’t seem to translate that belief into currency and rate positioning this past session. According to the central bank’s numbers, mortgage approvals in June rose for the first time in 8 months and put the pressure back on policy makers. That said, neither the pound nor two-year UK bond yields would respond with material strength. Today, we have business and consumer sentiment surveys due.

Yen Pairs to be Fully Preoccupied with Capital Market’s Activity Level

Over the past 24 hours, the Japanese yen completely ignored data that showed the country’s unemployment rate rose unexpectedly, household spending dropped and industrial production fell in June. The degree of change needed in Japan’s data to encourage the Bank of Japan to reconsider its monetary policy stance going forward is significantly higher. That means, we default to the funding currency’s natural driver: risk trends. If the upcoming wave of US (or other) data can stir speculative trends, expect the yen crosses to respond.

Australian Dollar: Is the RBA’s Next Move a Hike or Cut?

Australian yields are starting to take a slow and begrudging turn higher – following an early change in tack from the Aussie dollar itself. The possibility of a rate hike is starting to take shape on the horizon. However, there are some that are still holding out the chance of a return to cuts between a high A$, collapse in inflation and China struggle. The marginal change needed to inspire hikes at this point is much lower than cuts.

Emerging Market: Be on the Lookout for Ukraine 2Q GDP

A day out from the heaviest round of event risk in weeks, it comes as little surprise that the Emerging Market capital markets and currencies are moderating. The steady flow of capital into the ‘developing’ region requires low volatility and robust ‘developed’ financial system confidence. US GDP certainly puts that quiet in jeopardy. Meanwhile, watch for an expected Ukraine 2Q GDP release scheduled for the next 48 hours.

Gold Traders More Worried about Inflation, Risk Aversion or Dollar Appeal?

Which of its major roles is gold more sensitive to: safe haven, inflation hedge or alternative to traditional fiat currency? That likely depends on how strong the underlying currents for each are. The upcoming event risk is unlikely to leverage the metal’s inflation function. However, US GDP and FOMC decision are more than capable of driving risk trends or spurring traditional currency controversy. **Bring the economic calendar to your charts with the DailyFX News App.

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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