News Column

Dollar Rally Comes to a Halt as CPI Benchmarks Fed Rate Outlook

May 14, 2014

John Kicklighter

Talking Points:



  • Dollar Rally Comes to a Halt as CPI Benchmarks Fed Rate Outlook
  • Euro Traders Look to See Whether 1Q GDP and CPI Data Will Turn Stimulus Tide
  • Pound Tumbles Despite BoE Caving to Hawkish Pressure



    Dollar Rally Comes to a Halt as CPI Benchmarks Fed Rate Outlook



    With the Dollar slipping below 1.3750 versus the Euro, testing 1.6750-resistance versus the Pound and USDollar standing at the threshold of its 2014 bearish channel ceiling; the market is taking the temperature on conviction. If the greenback progresses further with this past week's rally, a correction could take a big step towards a trend reversal; and a bear trend could be permanently turned on its head. The upcoming docket seems well equipped to make the decision on the currency's bearings as it taps into the one of the most proactive fundamental themes in the global financial markets: relative monetary policy expectations. Yet, Wednesday's pause show there is still cause for doubt and perhaps concern. Looking to the Treasury market, yields on the 2-year (a more optimal gauge for the opening shift to a Fed rate hike regime) to the speculative favorite 10-year note were markedly lower - the latter plunging levels not seen in 7-months.



    The slump in rates may be a sign that speculative for the FOMC's return to a hawkish regime is being pushed back, but it may also reflect a nascent appetite for 'safe haven' assets with the S&P 500's fumble this past session. Today's data may resolve the uncertainty. In a deluge of releases, the CPI measures for April and TIC flows for March stand out. Though somewhat 'stale', the TIC report gives an important measure of capital flow into or out of the economy. This is a particularly important assessment as the market focuses on 'scramble for yield' and relative policy schemes. However, the best measure for taping into the rate outlook is the consumer inflation report. This represents one of the Fed's dual mandates (stable inflation and full employment) and is generally the component that will eventually determine the need for policy tightening. The bar is already set high with the consensus calling for a 2.0 percent pace - which would match the fasts pace since October 2012. Missing this target would not likely materially diminish a mid-2015 hike time frame. But beating it could move it forward...



    Analysts will cover the release of CPI today. Find out what live events and webinars are scheduled in DailyFX for this week!



    Euro Traders Look to See Whether 1Q GDP and CPI Data Will Turn Stimulus Tide



    The momentum for sentiment behind the ECB's change in tack is proving substantial. Last week's immediate response was volatile, but the weight of the threats to potentially push forward new accommodative steps in June further carried EURUSD through the technical boundary of its nearly two year bull trend. Though the threat was there, the motivation to take action against deflation, lingering growth troubles and a rising exchange rate wasn't considered serious until that fateful moment. Between now and the June 5 central bank meeting, all important data will be assimilated into assessments for whether the central bank will move or not. A big update to this balance comes today. The 1Q GDP readings are of exceptional import . However, the region' s CPI reading and the ECB's monthly report should not be overlooked.



    Pound Tumbles Despite BoE Caving to Hawkish Pressure



    When 'pricing in perfection', the chances of missing the mark are very high. That is what happened to the Pound when traders absorbed the Bank of England's Quarterly Inflation report this past session. Generally, the central bank was optimistic with an economic forecast for 2014 projected at 3.4 percent and three-year unemployment projection between 5.25 and 5.75 percent. BoE Governor Carney even remarked that the economy was moving closer to the point where a rate hike would be necessary. Starting from neutral, that would have been a big jump for the pound. However, the moderate tone would dampen hawkish expectations for a hike in the final months of 2014 or opening of 2015.



    Japanese Yen: Hopes of a July Stimulus Upgrade Fade Further after GDP



    There are two catalysts that can drive the Yen crosses lower: risk aversion and an unwinding of BoJ-intervention premium. The former would be a proactive catalyst, but we could be waiting a while if our trades were dependent on the theme. Despite the central bank's efforts to talk down expectations of further stimulus upgrades at its April meeting, there is still considerable premium behind this hope keeping these pairs buoyant. This morning's 1Q GDP jump (5.9 percent) materially reduces the need for greater intervention. Kuroda reinforced that sentiment in testimony.



    Chinese Yuan: Authorities Send Mixed Messages to Market



    The Chinese offshore Renminbi (CNH) was up a second day against the dollar, but momentum is still falling short of the requisite shift in momentum for speculators. Recently, both the IMF and OECD warned that a further downgrade in growth forecasts could be ahead. Recognizing the pain, the PBOC reportedly called on China's banks to increasing lending - a mixed message for a credit cleanup.



    Emerging Markets: Ruble Looks for First 5-Day Run in 8 Months



    The retreat for the S&P 500 and indecision for global equities didn't seem to dampen the appetite for Emerging Markets as a risk exposure. The MSCI EM ETF rose a third consecutive session (0.7 percent to 42.78) and the Bloomberg EM Sovereign Bond Index is 0.3 percent below its record high. While we have seen a variance in demand for different 'risk' assets, it is nevertheless diminishes potential when they are so divergent. For the FX set, the Russian Ruble advanced a fourth day as Putin warned against a Ukraine vote amid a possible civil war.



    Gold Advance Above $1,300 Has Few Disciples Just Yet





    ECONOMIC DATA



    GMT

    Currency

    Release

    Survey

    Previous

    Comments

    5:00

    JPY

    Consumer Confidence Index



    37.50



    5:30

    EUR

    French Gross Domestic Product (YoY)

    0.9%

    0.8%

    It is likely to be a volatile morning for the Euro with preliminary German 1Q GDP figures. It is important to note that the CPI figures are final and the print may be more muted so long that we do not see any deviation from the initial print earlier in the month.

    5:30

    EUR

    French Gross Domestic Product (QoQ)

    0.1%

    0.3%

    6:00

    EUR

    German Gross Domestic Product s.a. (QoQ)

    0.7%

    0.4%



    6:00

    EUR

    German Gross Domestic Product n.s.a. (YoY)

    2.5%

    1.3%



    8:00

    EUR

    Italian Gross Domestic Product s.a. and w.d.a. (QoQ)

    0.2%

    0.1%



    9:00

    EUR

    Euro-Zone Gross Domestic Product s.a. (QoQ)

    0.4%

    0.2%



    9:00

    EUR

    Euro-Zone Gross Domestic Product s.a. (YoY)

    1.1%

    0.5%



    9:00

    EUR

    Euro-Zone Consumer Price Index - Core (YoY)

    1.0%

    1.0%



    9:00

    EUR

    Euro-Zone Consumer Price Index (MoM)

    0.2%

    0.9%



    9:00

    EUR

    Euro-Zone Consumer Price Index (YoY)

    0.7%

    0.5%



    12:30

    USD

    Consumer Price Index Ex Food & Energy (MoM)

    0.1%

    0.2%

    PPI figures came in stronger than expected on Wednesday at 0.6% with the food component coming in over 2.0% MoM.



    Empire Manf. has come in positive since January 2013.

    12:30

    USD

    Consumer Price Index (MoM)

    0.30%

    0.20%

    12:30

    USD

    Consumer Price Index (YoY)

    2.0%

    1.5%



    12:30

    USD

    Consumer Price Index Ex Food & Energy (YoY)

    1.7%

    1.7%



    12:30

    USD

    Continuing Claims

    2755K

    2685K



    12:30

    USD

    Initial Jobless Claims

    320K

    319K



    12:30

    USD

    Empire Manufacturing

    6.00

    1.30



    12:30

    CAD

    Manufacturing Shipments (MoM)

    0.30%

    1.40%

    Following Wednesday's massive bond rally, TIC data may cause further volatility in Treasuries. Watch USD/CAD as we will be getting key home and manufacturing data.

    13:00

    CAD

    Existing Home Sales (MoM)



    1.00%

    13:00

    USD

    Net Long-term TIC Flows

    $40.0B

    $85.7B



    13:00

    USD

    Total Net TIC Flows



    $167.7B



    13:15

    USD

    Industrial Production

    0.00%

    0.70%



    13:15

    USD

    Capacity Utilization

    79.20%

    79.20%



    13:15

    USD

    Manufacturing (SIC) Production

    0.30%

    0.50%



    14:00

    USD

    Philadelphia Fed.

    14.0

    16.6



    14:00

    USD

    NAHB Housing Market Index (MAY)

    49.00

    47.00



    14:00

    USD

    Mortgage Delinquencies (1Q)



    6.39%



    14:00

    USD

    MBA Mortgage Foreclosures (1Q)



    2.86%





    GMT

    Currency

    Upcoming Events & Speeches

    4:25

    JPY

    BOJ Governor Kuroda Speaks in Tokyo

    8:00

    EUR

    Publishes Monthly Report

    23:00

    USD

    Fed's Yellen Speaks to U.S. Chamber of Commerce in Washington









    SUPPORT AND RESISTANCE LEVELS



    To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

    To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table



    CLASSIC SUPPORT AND RESISTANCE



    EMERGING MARKETS 18:00 GMT



    SCANDIES CURRENCIES 18:00 GMT

    Currency

    USD/MXN

    USD/TRY

    USD/ZAR

    USD/HKD

    USD/SGD



    Currency

    USD/SEK

    USD/DKK

    USD/NOK

    Resist 2

    13.5800

    2.3800

    12.7000

    7.8165

    1.3650



    Resist 2

    7.5800

    5.8950

    6.5135

    Resist 1

    13.1500

    2.3000

    11.8750

    7.8075

    1.3250



    Resist 1

    6.8155

    5.8475

    6.2660

    Spot

    12.8983

    2.0713

    10.3074

    7.7517

    1.2503



    Spot

    6.5569

    5.4407

    5.9239

    Support 1

    12.8350

    2.0700

    10.2500

    7.7490

    1.2000



    Support 1

    6.0800

    5.3350

    5.7450

    Support 2

    12.6000

    1.7500

    9.3700

    7.7450

    1.1800



    Support 2

    5.8085

    5.2715

    5.5655



    INTRA-DAY PROBABILITY BANDS 18:00 GMT



    \CCY

    EUR/USD

    GBP/USD

    USD/JPY

    USD/CHF

    USD/CAD

    AUD/USD

    NZD/USD

    EUR/JPY

    Gold

    Res 3

    1.3806

    1.6865

    102.54

    0.8955

    1.0939

    0.9439

    0.8740

    140.84

    1323.34

    Res 2

    1.3784

    1.6842

    102.36

    0.8939

    1.0924

    0.9421

    0.8721

    140.55

    1318.64

    Res 1

    1.3763

    1.6819

    102.18

    0.8924

    1.0909

    0.9403

    0.8703

    140.27

    1313.95

    Spot

    1.3720

    1.6772

    101.83

    0.8893

    1.0879

    0.9368

    0.8666

    139.71

    1304.55

    Supp 1

    1.3677

    1.6725

    101.48

    0.8862

    1.0849

    0.9333

    0.8629

    139.15

    1295.15

    Supp 2

    1.3656

    1.6702

    101.30

    0.8847

    1.0834

    0.9315

    0.8611

    138.87

    1290.46

    Supp 3

    1.3634

    1.6679

    101.12

    0.8831

    1.0819

    0.9297

    0.8592

    138.58

    1285.76

    v

















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    Source: DailyFx