FX - Fed Monetary Policy Even More Dovish Than Anticipated

• Fed officials sounding even more dovish than thought
• Additional accommodation becoming legitimate reality
• Market reaction to dovish Minutes less aggressive than in past
• Gold market finding renewed bids in uncertain times

While the US Dollar did manage to post overall gains on Tuesday, the rally was not without disappointment after a slew of negative data out of the US, including a much softer consumer confidence reading and a very dovish Fed Minutes, opened the door for some late selling of the Greenback. The key takeaway from the Minutes was that there were a good deal of voting members on the Fed who were in fact pushing for the implementation of another round of quantitative easing and that even the more centrist members were willing to move in that direction if inflation readings were more contained. The Minutes were accompanied on the day by some commentary from Fed Evans, Kocherlakota and Bullard who all expressed these sentiments. Fed Evans was clearly the most dovish of the bunch, with the official aggressively calling for additional accommodative measures. The net result is a Fed that is deeply concerned with growth prospects.

The interesting twist will be to see just how the markets respond to Fed policy going forward. The reaction to announcements of QE1 and QE2 opened the door for a wave of buying into US equities and risk correlated assets on the expectation that more accommodation meant more easy money, more stimulus and more chance for a quicker recovery. However, at this point, it seems as though the reaction of buying back into risk correlated assets on the news is becoming less appealing, with market participants starting to maybe wake up to the notion that buying risk because a central bank is highly concerned with the outlook for the local and global economy is somewhat distorted. On the flipside, buying into the US Dollar is also not an attractive option with the economic outlook and ultra low yield detracting from the appeal. This conclusion is certainly supported by market reaction on Tuesday, with equities only rallying slightly on the day, while gold was significantly more enticing, with the safe haven yellow metal closing higher by some $30.

At the end of the day, the message is one of concern and we do feel that from a currency perspective, the US Dollar does stand to benefit in this environment even with all of the knocks against it. The broader global macro economic recovery is also faltering and growth prospects in the Eurozone are looking even less attractive. We also fear that things could still ripple over into the Asian markets, with China at risk for a major downturn. This leaves the safe haven appeal of the buck very much intact, despite the lack of return on the investment, and we continue to project upside for the Greenback going forward.

On the data front, economic releases out of Australia and New Zealand on Wednesday have not been good, with Aussie housing numbers deteriorating and New Zealand business confidence dropping off significantly from the previous print. Although the antipodeans have been well bid of late, we would be on the lookout for some major reversals in these markets over the coming sessions. Looking ahead, German unemployment data highlights the European session, while things pick up in North America with the release of US ADP, Chicago PMI, factory orders, and Canada GDP. On the official circuit, Fed Lockhart is slated to speak on the topic of the economy at 16:30GMT. US equity futures and commodities prices are consolidating their latest moves.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Although the market had recently broken higher to end a sequence of inter-day lower tops off, the overall structure remains bearish at this point, with the market still trying to put in a more medium-term lower top below the 1.4700 highs from May. Tuesday’s bearish reversal formation confirms outlook and from here, look for fresh downside back towards and eventually below 1.4250 over the coming sessions. Ultimately, only back above 1.4550 delays outlook, while only above 1.4700 negates.

USD/JPY:Although the market recently broke to fresh record lows below 76.00, failure to establish any downside momentum on the break suggests that the market could be looking to establish a more meaningful base. The latest daily close back above 77.30 encourages recovery outlook (despite the ensuing drop) and we look for additional upside over the coming sessions back towards critical short-term resistance by 80.25. Ultimately, only a daily close back under 76.50 delays constructive outlook.

GBP/USD: The market remains locked in a broader consolidation off of the April highs, and a fresh top is now sought out by 1.6600 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a daily close above 1.6550 would delay outlook and give reason for pause, while the latest daily close back under 1.6350 should accelerate declines. In the interim, look for any intraday rallies to be well capped below 1.6450 on a daily close basis. Back under 1.6200 accelerates.

USD/CHF: The latest sharp reversal off of record lows just shy of 0.7000 is encouraging and could finally be starting to signal the formation for a major base. Weekly studies are also confirming with the formation of a very bullish bottom close. From here, look for an acceleration of gains back towards the 0.8500 area over the coming days with setbacks expected to be well supported above 0.7800 on a daily close basis, where a fresh higher low appears to now be in place.

Written by Joel Kruger, Technical Currency Strategist

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