DailyFX

Dollar and Dow Ready for Fed and 1Q Growth Update

John Kicklighter

Talking Points:

  • Dollar and Dow Ready for Fed and 1Q Growth Update

  • Euro More Sensitive to Inflation Update than Growth Data

  • Yen Crosses: Is There Still Confusion Over BoJ’s Intentions?

Dollar and Dow Ready for Fed and 1Q Growth Update

The dollar and financial markets were less worried about forging a major trend this past session and far more interested in preparing for the upcoming session’s major event risk. There is plenty of top-tier calendar fodder, but the FOMC rate decision and US 1Q GDP statistics stand out over the rest. This combination of releases has the scope to not only reinvigorate US interest rate speculation – sidelined since the liquidity drain – they could actually change the course on broader risk trends given the proper outcomes. The impact of this wave depends on the market’s susceptibility and the actual outcomes. At best, we know there is a reasonable probability of volatility and a lower level of certainty that it will encourage a dollar advance. However, the market’s performance heading into the release is near certain: retracements and consolidation in preparation of the release.

In establishing which of the two major US events will prove more market-moving, timing is of critical importance. The growth report is due at 12:30 GMT while the central bank will release its announce its verdict and statement at 18:00 GMT. Both of these items have enough pull that traders will hesitate to place large trades on the earlier release on anything but a substantial deviation from consensus for fear of a Fed outcome that could contradict the move. That is not to mean that the first quarter’s GDP release is not important. However, its full impact may not be realized until after the policy meeting passes. If the central bank decree aligns with the economic data – whether on risk trend or rate forecasts – it could amplify the ultimate move and charge a true trend. If they conflict, the resulting move will be muted somewhat.

Preparing for the headline deluge and speculative confusion, there is a clear consensus for the Fed meeting. The group has repeatedly insisted the Taper is status quo and a change to rates is not even under consideration. What dollar traders care about is any changes in tone in the statement that clarifies the time frame for the first rate hike or – less likely – raises the possibility of a pause on the Taper. Even a small shift in timing for the Fed’s first tightening would leverage a serious response from the greenback. As for the GDP release, this may alter rate probabilities, but it could prove far more effective in generating a risk trend spark.

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