Dovish Comments Dent Dollar

A mixed day for the dollar, with EUR and JPY gaining modestly while the commodity currencies and CHF lost ground against the USD. The biggest loser was GBP, while the Scandis --- SEK and NOK – were the biggest gainers.

The main driver of the market was remarks by FOMC members Bullard, a noted hawk, and Dudley, a noted dove. Both were dovish, with Bullard noting the risk of deflation and urging the ECB to consider quantitative easing, while Dudley said the Fed could adjust QE up or down. The focus will remain on Fed policy today too as the FOMC releases the minutes of the May meeting and Fed Chairman Bernanke testifies in Congress on the US economy.

After yesterday’s adjustment in expectations, I expect that the risks are asymmetrical: expectations of imminent “tapering off” have diminished, hence further dovish comments (likely from Bernanke) would not have such a major impact, while signs in the minutes that a change in policy is being seriously considered could move the market significantly.

The pound lost ground as its inflation for April was much lower than expected (+0.2% mom vs. expected +0.4%, +2.4% yoy vs. +2.6%). The lower inflation gives the Bank of England more scope to cut rates if they choose, although the somewhat stronger-than-expected growth recently and the improving outlook means there is less pressure for them to cut rates, too. Nonetheless the pound weakened, perhaps in anticipation of today’s minutes of the May Bank of England meeting. The pound fell last month after the minutes continued to show a 6-to-3 split against further easing. With the same split likely to appear again this month, the same reaction is possible as well.

Other data out today includes the EU current account figure for March, with the surplus forecast to move lower from €16.3bn to €15.0bn. Not usually that market affecting. Existing US home sales for April may get more-than-usual attention after the recent slew of disappointing housing data. Forecasts are for a 1.4% mom gain to a 4.99mn annualized pace, up from -0.6% and 4.92mn in March.

It’s notable that these forecasts have been creeping up over the last few days despite the surprising decline in housing starts during the month. Those making the forecast must be quite confident. A number like that could swing sentiment back to the strong US economy/strong USD side, four hours before the FOMC minutes are due out.

The Market

EUR/USD

• EUR/USD moved higher after breaking resistance at 1.2900, continuing its rebound. The next strong resistance comes at 1.2980 where there is a 23.6 % Fibonnacci retracement as well as the 50 Day Moving Average and 1.3030 in extension. The area near 1.2900 is expected to act as a support with 1.2855 to remain a lower trend line support.

USD/JPY

• USD/JPY moved marginally higher yesterday, while being unchanged from last night with resistance found at 102.90. Resistance lies in the 102.90-103.00 area, while a break of 103.30 will find the pair with no significant resistance till 104.00. Well-tested support remains at 101.95, with further support at 101.35.

GBP/USD

• GBP/USD continued to move lower after breaking the 1.5200 level, but found support at its bottom Bollinger level. The pair is likely to move lower today and support is to be found at the 1.5100 psychological level and also bottom Bollinger level, with a break leading to 1.5040. The 1.5200 level is likely to act as strong resistance today, followed by another strong resistance at 1.5270.

Gold

• Gold’s rebound yesterday found once again resistance at $1400 and ended up the day with losses. Resistance remains at $1400 with a breakout leading towards the $1423 – 1431area. Support comes at the previous lows of $1350 and $1340 with the Stochastic still remaining bullish.

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MARKETS SUMMARY