Number One Focus for Dollar this Week

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It has been a quiet morning in the foreign exchange market with no U.S. economic reports on the calendar. Don’t expect U.S. data to be a big driver of currency flows this week since the only piece of somewhat market moving data won’t be released until Friday and even then, there’s a good chance that forex traders will shrug off the trade balance report since it rarely triggers a big move in the greenback. Instead, the main focus for the dollar and the foreign exchange market will the speeches from Federal Reserve Presidents. The big surprise last week was the Fed’s discussion about ending QE3 in 2013. While the upward revision to the unemployment rate eased some concerns, if job growth continues at a steady pace, the Federal Reserve could be compelled to end asset purchases this year.

The confusion created by the FOMC minutes makes this week’s comments from Fed Presidents extremely important because investors want to know how serious the central bank is about phasing out QE. Fed President Lacker is speaking on Tuesday followed by George, Bullard and Kocherlakota on Wednesday and then Fed President Plosser on Friday. While all 5 members are expected to talk about the economic outlook, the 2 speeches to pay attention to are those of Kansas City Fed President George and St. Louis Fed President Bullard because they are set to become voting members of the FOMC this year. George is assumed to be a major hawk while Bullard is a wildcard. This year, the central bank loses Lacker, its most hawkish member and Pianalto a dove. If George and Bullard support phasing out asset purchases this year, the dollar could extend its rise.

Fourth quarter earnings season also begins this week and given the lack of U.S. data, the fluctuations in stocks could have a stronger impact on currencies. Traditionally, the EUR/USD and the S&P 500 have a solidly positive correlation but since the middle of December, this correlation has broken down which means either the S&P 500 (white line) needs to correct or the EUR/USD (green line) will rally and Q4 earnings could determine how this relationship resumes.

Kathy Lien
Managing Director

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