Mid-Day Report: Dollar Recovers as Markets Await FOMC

Dollar pares some of this week’s loss as markets are awaiting FOMC minutes. After all, the greenback is stuck in range against other major currencies and is rather directionless in near term. While the FOMC minutes could trigger some volatility, range breakout seems unlikely. The strong employment data in June lifted the speculations that Fed could raise interest rates earlier than expected. That is, Fed could hike rates in spring of 2015, rather than fall. Nonetheless, the minutes from June’s meeting could be a bit dovish as it might show that Fed is not in a hurry to remove policy stimulus. The minutes will also provide the background information for the forecast changes released after the meeting. Also, there could be some discussions regarding exit strategies.

As the market awaited the FOMC minutes for the June meeting, Fed presidents Lacker and Kocherlakota spoke yesterday. While the former believed that the US economy would continue to grow modestly, with inflation well behaved, the latter warned of the headwinds to any growth acceleration. Regarding modest growth, Lacker stated that “sustained acceleration of growth to something over 3% in the near future is unlikely”. According to Kocherlakota, “inflation will slacken off by the end of the year” and “interest rates are going to be low relative to historical experience for more than just a few years to come”. While these comments sent little hint to the Fed’s policy outlook, the back-up in shorter-end US yields indicated that investors were expecting an earlier rate hike that previously expected.

Headline CPI in China moderated to 2.3% yoy in June from 2.5% a month ago. This was compared with market expectations of a milder ease to 2.4%. The disappointment was mainly driven by food price inflation which decelerated to 3.7% yoy in June from 4.1% in May. Non-food inflation stayed flat at 1.7% y/y. Underlying inflation pressure in China should remain benign and is overall CPI inflation is expected to stay well-below the 3.5% target set by the government. Meanwhile, soft inflation pressure should not constrain PBOC’s monetary easing and policymaker should implement stimulus in the form of rate cut or RRR cut to lower the funding cost and bolster growth. More in Benign Inflation Presents No Constraint For PBOC’s Easing.

Elsewhere, Canada housing starts came in better than expected at 198k in June. Japan machine orders rose 34.2% yoy in June. UK BRC shop price index dropped -1.8% yoy in June. Japan money stock M2 and CD rose 3.0% yoy in June. Australia Westpac consumer sentiment rose 1.9% in July.

Daily Pivots: (S1) 1.3593; (P) 1.3605 (R1) 1.3623; More….

EUR/USD’s recovery faced some resistances from 4 hours 55 EMA and retreated. Intraday bias remains neutral with focus on 1.3575 minor support. Break will likely extend the fall from 1.3993 and will turn bias back to the downside for 1.3502 and then 1.3476 key support level. Meanwhile, above 1.3700 will bring another rally. But in that case, we’d expect strong resistance above 61.8% retracement of 1.3993 to 1.3502 at 1.3805 to bring reversal.

In the bigger picture, overall price actions from 1.6039 is viewed as a corrective pattern. The choppy rise from 1.2042 is seen as a leg inside the pattern. Bearish divergence condition in daily and weekly MACD raises the chance that this leg is finished at 1.3993 already. Break of 1.3476 support will confirm this bearish case and should target 1.2755 and below. Meanwhile, break of 1.3993 is needed to confirm rally resumption. Otherwise, we won’t turn bullish even in case of strong rebound.

EUR/USD 4 Hours Chart

EUR/USD Daily Chart

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
23:01
GBP
BRC Shop Price Index Y/Y Jun
-1.80%

-1.40%

23:50
JPY
Japan Money Stock M2+CD Y/Y Jun
3.00%
3.00%
3.30%

00:30
AUD
Westpac Consumer Confidence Jul
1.90%

0.20%

01:30
CNY
CPI Y/Y Jun
2.30%
2.40%
2.50%

01:30
CNY
PPI Y/Y Jun
-1.10%
-1.00%
-1.40%

06:00
JPY
Machine Tool Orders Y/Y Jun P
34.20%

24.10%

12:15
CAD
Housing Starts Jun
198K
190.0K
198.3K

14:30
USD
Crude Oil Inventories

-1.7M
-3.2M

18:00
USD
FOMC Minutes

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