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Outlook on the US dollar ahead of FOMC minutes, key data

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Outlook on the US dollar ahead of FOMC minutes, key data

The US dollar faces a potentially volatile week of trade as market participants weigh the latest testimony from Federal Reserve Vice Chairman Janet Yellen against a backdrop of important economic data. The incoming Fed Chair likely won’t run out of reasons (or excuses, depending on which side of the debate you’re on) to maintain the current pace of quantitative easing.

The Fed will release the minutes of its October FOMC policy meetings November 20. The policy announcement that followed the meetings surprised no-one, as the Fed used the 16-day government shutdown to advance the current pace of QE3 for yet another month. However, the policy announcement wasn’t as dovish as many expected, reigniting speculation the central bank could pursue an alternative path. The minutes will reveal whether there is internal dissent among Fed officials about the pace and timing of an asset taper, as well as shed light on the decision making process.

Government economists will produce data on consumer inflation, retail sales and previously-owned home sales November 20, followed by weekly jobless claims on the 21st. Markit Group will release data on the US manufacturing Industry on the 21st.

Below is a breakdown of the releases that could impact the major peers this week.

The pair gained 34 pips to 1.3528 in the European session, outweighing the negative criticism triggered by the European Central Bank. The euro would eventually fall back toward the 1.35 handle, as the common currency remains entrenched in negative territory. The ECB slashed interest rates for a second time this year after inflation expanded at the slowest rate in four years. Official data last week showed the picture was much worse than previously expected for some of the euro area’s largest member-states, including Italy, where inflation fell 1.9 percent from year-ago levels.

The pair’s recent highs will be tested by several euro area data releases. The ZEW will produce monthly data on economic sentiment. The closely monitored survey captures institutional investor sentiment toward Germany and the broader euro area. The European Commission will also produce data on consumer confidence. Manufacturing PMI, courtesy of Markit Group, could trigger considerable volatility for the euro.

The pound enters the week well bid after the Bank of England revised its growth forecast for the UK economy and brought forward its rate guidance. The GBPUSD remains in consolidation mode, as market participants weigh the minutes of the latest BOE policy meetings, scheduled for release November 20. A hawkish outlook from BOE officials will push the pound forward. The GBPUSD has carved out higher lows in November, which could set the pace for a re-test of 1.62 and eventually 1.63.

The USDJPY eased off its highs after the pair unexpectedly broke the psychological 100 last week. The yen weakened after Japanese Finance Minister Taro Aso said more currency intervention is needed to address market volatility. The USDJPY pair had been capped below 100 since September 11.

The pair backtracked toward 99.96, a loss of 0.3 percent, as market participants awaited a heavier flow of economic data later in the week. The Japanese government will release several economic indicators this week, including the leading Economic Index and the October trade balance. The Bank of Japan will close out the week with the monthly economic survey, which provides a balanced review of developments inside and outside Japan.

The USDCAD backtracked in the European session, as the pair continued easing off last week’s high of 1.0522. The pair fell 21 pips to 1.0417 in Europe, as market participants look ahead to an active data wire. Sentiment toward the Canadian dollar is mostly negative, as economic growth north of the 49th parallel remains dependent on US recovery. The loonie remains relatively idle until Friday, when Statistics Canada reports on consumer inflation and retail sales.

The markets are unlikely to take this week’s data as a gauge for US monetary policy. Inflation will remain well below the Fed’s target and retail sales will grow only modestly, according to forecasts.

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