DailyFX
Fundamentals: Dollar Ends Day Lower but FOMC Holds Back the Bears
John Kicklighter

Talking Points:

  • Dollar Ends Day Lower but FOMC Holds Back the Bears

  • Euro Advance on Inflation, Growth Updates Under ECB Watch

  • Yen Crosses Retreat as BoJ Further Quells QE Upgrade Hopes

Dollar Ends Day Lower but FOMC Holds Back the Bears

This past session offered up a remarkably weak 1Q US GDP release which made the Federal Reserve’s decision to uphold withdrawal from stimulus even more surprising. Yet, through this back and forth, neither the dollar nor broader risk trends would win a critical breakout or forge new trend. Isthis unwavering stoicism a reflection of the market’s general state – where complacency is so engrained that the market’s will refuse to reevaluate even under duress? Or is this the perfect balance of positive and negative event risk that the currency and general risk trends can hold steady? It’s likely a mixture of both.

In underlying market conditions, the grip of complacency is difficult to miss. Implied (expected) volatility measures have collapsed, assets have traded trends for range and participation has withered. Under this sort of lassitude, the market is dulled to changes in the traditional fundamental landscape. In other words, the hurdle is not to measurably improve or impair a currency’s outlook against its counterpart to necessitate an exchange rate response. Rather, we need something that can disrupt contentment and generate volatility in speculative positioning. An unexpected stall in the world’s largest economy (0.1 percent growth versus 1.2 percent consensus) sets a troubling precedence for general risk trends. That is further complicated by the FOMC decision to maintain their $10 billion Taper pace – QE3 is now running at a $45 billion-per-month clip – and an optimistic outlook that reinforces the mid-2015 target for the first Fed hike.

A market-wide ‘risk aversion’ move is the most capable theme for reviving activity levels in the global financial system. Yet, until that seismic change is realized, this past session’s event risk poses another interesting fundamental picture for the greenback. Alone, the GDP reading could have soured the market’s outlook for the return of a hawkish rate regime. Skepticism that the slump was transitory on weather related issues, however, was reinforced by the central bank’s unwavering commitment to the stimulus wind down. While Treasury yields slid on the day, this combination may prevent a more substantive dollar slide. If the Fed’s position in the interest rate ranks holds, a dollar slide will likely be limited – and Friday’s NFPs will carry greater weight in further shaping rate timetables.

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