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Forex: Dollar Ready for Fed, GDP with EUR/USD at 1.3500
John Kicklighter

  • Dollar Ready for Fed, GDP with EUR/USD at 1.3500

  • Euro Eases Ahead of Spain 4Q GDP Despite EFSF Auction

  • New Zealand Dollar: Poor Inflation Data to be Weighed by RBNZ

  • British Pound Advance Comes on BoE Reports of Fading Currency Use

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  • Australian Dollar Rebounds as Rate Expectations Jump

  • Gold: Best Measure for Market’s Reaction to Fed Stimulus Call

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Dollar Ready for Fed, GDP with EUR/USD at 1.3500

The Dow Jones FXCM Dollar Index (ticker = USDollar) finally backed off its run to six-month highs, the day before the 4Q US GDP and the Federal Reserve’s rate decision is due. Prior to Wednesday’s slide for the greenback, the currency managed to drive a four-day consecutive rally – matching the strongest run for the Index in three months. The pullback is appropriate in reverence to the considerable influence the upcoming event risk carries over, not only the US dollar, but the entire financial sector. Perhaps this round of event risk will be influential to remedy the fundamental divergence in the dollar’s gains against key counterparts (Japanese Yen, British pound and Australian Dollar) at the same the benchmark capital market’s conviction measures (the S&P 500 and other equity indexes) push higher. In other words: perhaps this is the catalyst that finally reinstates general risk appetite trends – whether supportive of or resistant to speculative sentiment.

Heading into the big ticket headline fodder, the first piece of event risk to hit the wires will be the advanced (first) reading of fourth quarter GDP. The consensus estimate for annualized growth measure is calling for a substantial cooling of the previous reading’s 3.1 percent pace of growth to a much more reserved 1.1 percent clip. That would mark the slowest measure of growth for the US since the first quarter of 2011. Yet, how market moving would an in-line reading prove? We have to assume that the economist forecast has been priced in by the market (especially after the IMF and World Bank downgraded their respective growth forecasts for the country). A substantial miss is likely necessary to spur risk aversion – which counterintuitively would generate demand for the safe haven dollar. More likely, a reading near the consensus will sideline the capital markets and benchmark currency as the focus (and hopes) turns to the Federal Open Market Committee’s (FOMC) rate decision.

In theory, relative growth should be a vital pricing mechanism for the value of a currency; but we find that is far from the case in practice nowadays. Relative stimulus has both the effects of guiding market-wide risk taking as well as creating an environment where currencies are (perhaps unintentionally) devalued by expansive policies. Amongst the major banks, the Federal Reserve is the most liberal (the BoJ won’t move until 2014) in its efforts – a reality that has no doubt contributed to EURUSD’s advance as the ECB withdrawals LTRO and is ignored by the USDJPY at multi-year highs. The $85-billion-per-month effort that the US central bank has adopted along with economic guidelines (6.5 percent jobless and 2.5 percent inflation rates) was put into place only last month. Therefore a material change in January is highly unlikely. That said, the market will be open to any nuanced change in language that spells an end (or reduction) to stimulus before the end of 2013.

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