DailyFX
Dollar: Will Market Shift Towards Fed Bullard’s View?
John Kicklighter

Talking Points:

  • Dollar: Will Market Shift Towards Fed Bullard’s View?

  • British Pound On Volatility Watch Again with CPI

  • Euro Already Adjusted for ECB Stimulus?

Dollar: Will Market Shift Towards Fed Bullard’s View?

The market was leaning heavily on the bearish rudder for the US Dollar to start the new trading week, but a bounce in shorter duration Treasury yields – better measures for Fed rate benchmarking – saved the currency from a definitive bear trend. Yet, in spite of the last-minute save, the currency is still struggling to regain traction on its effort to mount a lasting recovery begun earlier in the month. So far in May, the dollar is up against only three of its major counterparts (Euro, Franc, Pound) and lower against the balance. Neither risk trends nor monetary policy forecasts have evolved in favor of the greenback. Then again, neither have their unfavorable bearings sent the currency reeling. Skepticism and hesitation seems to be balanced against both the bullish and bearish paths. That puts the onus for active trades on volatility.

The phenomenon of the market’s current volatility drought continues to sink to ever more extraordinary levels. While much of the attention is still paid to the low levels of the stock-based VIX bubbling around 12 percent – a natural floor exists around 10-12 vols historically – the FX market readings are arguably more extreme. The medium-term (1-month) expected FX volatility reading currently stands at 6 percent. The absolute low was set 7 years ago at 5.48 percent. On an even shorter scale, the one-week reading hit a record low of 5.0 percent. A natural rebalancing of this extreme would see a rebound in volatility which has a directional bias towards risk aversion. In a sharp ‘risk off’ move, the dollar would theoretically regain its distanced safe haven appeal. While we wait for sentiment to find level again, the dollar seems comfortable with its relationship with Treasury yields. Last Friday, St. Louis Fed President James Bullard remarked that under his optimistic view, a rate hike could come at the end of Q1 2015. If the market is persuaded towards his view, there is plenty of premium to climb.

British Pound On Volatility Watch Again with CPI

Honors of top scheduled event risk this week goes to the British Pound which faces the April round of inflation data in the upcoming London session – due at 8:30 GMT to be precise. The price pressure assessment will be a broad one with measures for consumer, factory, retail and housing statistics. The cumulative reading on inflation is a critical component to the Bank of England’s monetary policy map as they derive their timeframe for the first rate hike out of prominent headwind. However, to simplify the speculative procedure, traders will focus on the CPI reading for their assessment of timing the hawkish turn. The annual reading is expected to tick up to 1.7 percent (from 1.6) while the core moves up to 1.8 percent (from 1.6). If met, that would slowly feed already aggressive expectations. But, there is far more impact on a shortfall here.

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