The US Dollar is broadly mixed to start Thursday, in what could perhaps be its last stand against a recent onslaught across the board. Following four out of five very disappointing labor market readings as measured by Nonfarm Payrolls (April: +68.0K; May: +87.0K; June: +45.0K; July: +141.0K; August: +96.0K) and US growth barely moving higher at an annualized rate of +1.7%, expectations are running high for another round of quantitative easing out of the Federal Reserve.
At the Jackson Hole Economic Policy Symposium, Chairman Ben Bernanke outlined an argument that was sufficient enough to “conclude that nontraditional policy tools have been and can continue to be effective in providing financial accommodation,” though he was careful to note that “[policymakers] are less certain about the magnitudes and persistence of those effects than we are about those of more-traditional policies.”Expanding on this, Chairman Bernanke said that “one possible cost of conducting additional LSAPs is that these operations could impair the functioning of securities markets…a second potential cost of additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time.”
Overall, the Federal Reserve chairman concluded that “it seems clear…that such [nontraditional] policies can be effective…taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a strong economic recovery and sustained improvement in labor market conditions in a context of price stability.”Thus, the Federal Reserve is primed to act, willing to act, but is not sure that what has been used in the past will be as effective going forward. As such, any new forms of easing, in our opinion, are likely to be cut from a different cloth than previously deployed LSAPs or MEPs, likely aimed at helping consumers and home owners more directly.
Taking a look at credit, peripheral European bond yields are back up (marginally), weighing on the Euro’s bullish technical bias. The Italian 2-year note yield has increased to 2.210% (+8.7-bps) while the Spanish 2-year note yield has increased to 2.748% (+7.0-bps). Similarly, the Italian 10-year note yield has increased to 5.019% (+1.1-bps) while the Spanish 10-year note yield has increased to 5.633% (+7.9-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:48 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.04% (-1.58% past 5-days)
The docket is packed today with a few very important events, all revolving around the United States. At 08:30 EDT / 12:30 GMT, the USD Producer Price Index (AUG) report is due, and is expected to show that inflationary pressures at the factory gate (as opposed to at the cash register, which is what the Consumer Price Index measures) are back on the rise, a poor sign for a downtrodden American consumer whose annual income household has fallen back to 1995 levels. But later in the day is when the fireworks will start.
At 12:30 EDT / 16:30 GMT, the Federal Open Market Committee Rate Decision is due, where it is widely expected that the key interest rate will be on hold at 0.00% to 0.25%. But a change in rate is not what makes this meeting important; instead, market participants will be eagerly awaiting to see the FOMC Economic Projections at 14:00 EDT / 18:00 GMT ahead of Federal Reserve Chairman Ben Bernanke’s Press Conference at 14:15 EDT / 18:15 GMT.
To view my thoughts on the matter, please revisit the articles below.
BB represents Bollinger Bands ®
EURUSD: Nothing has changed: “The EURUSD made a huge technical breakthrough on Friday by shattering a yearlong descending trendline off of the August 2011 and October 2011 highs. This now marks the potential for a long-term bottom at the 1.2040/45 low. Additionally, while our bias for a move towards 1.1500 by November 1 is negated, a weekly close back within the channel – back below 1.2620/35 (former yearly low set in January) – would suggest a false breakout has occurred.” Near-term resistance comes in at 1.2930/35 (61.8% Fibonacci retracement on February high to July low) and 1.2980/1.3000. Support comes in at 1.2820/25 (late-May swing highs), 1.2740/50, 1.2620/35, 1.2500/10, and 1.2460/80.
USDJPY: The June 1 swing low at 77.65/70 is being tested currently but without a daily close below said level, we believe there is scope for a rebound. It is unlikely that such an event will occur barring a significant fundamental catalyst: the Federal Reserve announces a major outright bond-buying program. We’ve been suggesting that “penetration of the August low at 77.90 will likely result in a washout to new lows with the potential for 77.65/70 and 77.30.” While this has begun, we remain cautious for the rest of the day with the FOMC on deck. A move back above 77.90 exposes 78.10/20, 78.60, and 79.10/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs)
GBPUSD: We’ve maintained: “As long as price on the daily chart is supported by 1.5930/40, there’s reason to believe that a run up to 1.6120/40 is possible during September.” Yesterday, the GBPUSD rallied into 1.61020/40 and has reversed, suggesting a near-term top may be in place now that the short-term trend is conflicting with major resistance in the longer-term trend. Should 1.6120/40 break, the former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus; this would also represent a break of the descending trendline off of the April 2011 and August 2011 highs. Below 1.5930/40, near-term support comes in at 1.5860/75 (ascending trendline off of August 2 and August 31 lows), 1.5770/85 (late-August swing lows), and 1.5700.
AUDUSD: The AUDUSD has pared back its gains today, working on an Inside Day with the potential for a false break out on the horizon. The pair is currently sitting at immediate near-term support at 1.0435/45 (mid-July and early-August swings), with additional support come in at1.0380/1.0400 and 1.0320/25 (200-DMA, early-July swing highs). In the short-term, there are two key levels to the upside: 1.0530/45 (former highs in July and August) and 1.0560/70 (descending trendline resistance off of the February 29 and August 9 highs).
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