Mid-Day Report: Dollar Soft ahead of FOMC, Sterling Rebounds on GDP

By: Milla Shaw in Forex Consultant on Apr. 25, 2011

Dollar remains broadly weak as markets are awaiting FOMC rate decision and Bernanke’s press conference today. US durable goods orders rose 2.5% in March with ex-transport orders up 1.3%, comparing to expectation of 2.2% and 1.7% respectively. There is little reaction to the data while dollar index recovers mildly after dipping to as low as 73.49 earlier today. Yen is generally weaker after S&P downgraded outlook of Japan’s AA- local-currency government debt rating from stable to negative on costs for rebuilding after the natural disaster in March.

Sterling rebounds strongly today after Q1 GDP report showed 0.5% qoq, 1.8% yoy growth, inline with expectation. The pound has been under some mild pressure earlier in the week on rumors of a weaker than expected GDP figure but the worry was eased after today’s report. Strength in the economy, though, is not enough to bring forward rate hike by BoE yet. Markets continued to push back expectation on BoE rate hike and is now pricing in a hike in November. The key event to watch ahead would indeed be the quarterly inflation report to be published on May 11. Before that, the pound will likely continue to lag behind Euro and Aussie in capitalizing dollar’s weakness. Other data from UK saw BBA loan for house purchases rose more than expected to 31.7k in March. Index of services dropped -0.3% 3M/3M in February.

The April FOMC meeting will unlikely contain any surprise in monetary policies, i.e. the Fed funds rate will stay a 0-0.25% and the asset-buying program will be maintained at $600B with expiry in June. The focus is on the first post-meeting press briefing at which Chairman Ben Bernanke will attempt to shape market expectations on inflation and monetary outlook. The briefings will be held 4 times a year and are scheduled to coincide with the updates of economic forecasts. More in Bernanke To Re-shape Thinking At The First FOMC Press Briefing.

The RBNZ will leave the OCR unchanged, after cutting it by -50 bps to 2.5% last month, at the April meeting. Economic indicators appeared to have gradually recovered from the earthquake in February. Yet, more evidence in coming months is needed to prove the situation has improved. Meanwhile, benign underlying inflation also bought time for the central bank to take a wait-and-see approach and leave the monetary stance unchanged. Governor Alan Bollard will also clarify his comments made last week on exchange rates. More in RBNZ To Stand Aside After Cutting In March.

Australian dollar jumps to another new record high against US dollar today on the back of strong inflation reading. CPI accelerated to 3.3% yoy in Q1, above RBA’s target of 2-3% and well above expectation of 3.0% yoy. The RBA Trimmed Mean CPI also accelerated to 2.3% yoy but the Weighted Median CPI dropped to 2.2% yoy, both were above expectation of 2.1% yoy though. RBA’s tightening cycle stopped last November and rates has been kept at 4.75% since then. Economists are saying that RBA would start to worry that the it’s the beginning of a new upward inflationary spike even though Treasurer Wayne Swan played down the significance and said jump in inflation is “unsurprising” and was caused by “summer floods and Cyclone Yasi”. Markets are pricing in full 25bps hike in the next 12 months and focus will turn to upcoming employment data as well as June inflation reading.

Other data released today saw Eurozone industrial new orders rose 0.9% mom, 21.3% yoy in February. German Gfk consumer sentiment dropped to 5.7 in May. Japan retail sales dropped -8.5% yoy in March. New Zealand NBNZ business confidence rose to 14.2 in April.

Daily Pivots: (S1) 1.6427; (P) 1.6479; (R1) 1.6528; More.

GBP/USD’s strong rebound today suggests that consolidations from 1.6598 might have completed at 1.6431 already, ahead of 4 hours 55 EMA as expected. Intraday bias is cautiously on the upside and break of 1.6598 will confirm rally resumption for 100% projection of 1.5935 to 1.6426 from 1.6166 at 1.6657 next and then 100% projection of 1.5343 to 1.6400 from 1.5935 at 1.6992, which is close to 1.7 psychological level and 1.7043 key resistance. On the downside, though, break of 1.6431 will dampen this bullish view and bring deeper decline towards 1.6166 support instead.

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidation to long term down trend from 2007 high of 2.1161. Rise from 1.4230 is treated as the third leg of such consolidation and with 1.5935 support intact, such rise could still continue for 1.7043 resistance. But after all, strong resistance should be seen between 1.7043 and 50% retracement of 2.1161 to 1.3503 at 1.7332 to limit upside. On the downside, break of 1.4230 support will be the first signal of down trend resumption and will turn focus to 1.3503 low for confirmation.

GMT Ccy Events Actual Consensus Previous Revised

23:50 JPY Retail Trade Y/Y Mar -8.50% -6.10% 0.10% 01:30 AUD CPI Q/Q Q1 1.60% 1.20% 0.40% 01:30 AUD CPI Y/Y Q1 3.30% 3.00% 2.70% 01:30 AUD CPI RBA Trimmed Mean Q/Q Q1 0.90% 0.70% 0.30% 01:30 AUD CPI RBA Trimmed Mean Y/Y Q1 2.30% 2.10% 2.20% 01:30 AUD CPI RBA Weighted Median Q/Q Q1 0.80% 0.60% 0.50% 01:30 AUD CPI RBA Weighted Median Y/Y Q1 2.20% 2.10% 2.30% 03:00 NZD NBNZ Business Confidence Apr 14.2 -8.7 06:00 EUR German GfK Consumer Sentiment May 5.7 5.8 5.9 08:30 GBP GDP Q/Q Q1 A 0.50% 0.50% -0.50% 08:30 GBP GDP Y/Y Q1 A 1.80% 1.80% 1.50% 08:30 GBP BBA Loans for House Purchase Mar 31.7K 30.6K 29.9K 08:30 GBP Index of Services 3M/3M Feb -0.30% -0.30% -0.50% -0.60% 09:00 EUR Eurozone Industrial New Orders M/M Feb 0.90% 1.50% 1.20% 1.20% 09:00 EUR Eurozone Industrial New Orders Y/Y Feb 21.30% 21.80% 21.90% 21.90% 12:30 USD Durable Goods Orders Mar 2.50% 2.20% -0.60% 12:30 USD Durables Ex Transportation Mar 1.30% 1.70% -0.30% 14:30 USD Crude Oil Inventories 1.4M -2.3M 16:30 USD FOMC Rate Decision 0.25% 0.25% 21:00 NZD RBNZ Rate Decision 2.50% 2.50% EUR German CPI M/M Apr P 0.20% 0.50% EUR German CPI Y/Y Apr P 2.40% 2.10%

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