British Pound Already Down 7 Straight Days Faces UK 2Q GDP

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Talking Points:

• Dollar Traders Look Ahead to NFPs, GDP and FOMC Decision
• British Pound Already Down 7 Straight Days Faces UK 2Q GDP
• Euro Ready for a Turn after Data Improves, Yields Fall, EURUSD Doji

Dollar Traders Look Ahead to NFPs, GDP and FOMC Decision

The Dow Jones FXCM Dollar Index (ticker = USDollar) has moved to a five week high and is tempting a more substantial bullish production. That progress may have to wait until next week however. Through the past session, much of the dollar’s gains were founded in counter-currency developments – rather than innate strength on the greenback’s part. Modest gains for USDJPY were the work of risk trends, AUDUSD corrected after its preceding rally, and NZDUSD collapsed after the RBNZ rate decision.

From the dollar’s own docket, the data was less than encouraging. Markit’s measure of US manufacturing activity this month unexpectedly dropped and new home sales for June suffered the biggest monthly decline in purchases in four-and-a-half years. Furthering dimming the view of economic activity, the IMF released its World Economic Outlook (WEO). Theglobal forecast for 2014 was downgraded 0.3 percentage points from April’s projection to 3.4 percent. For the United States the reduction was far more substantial – lowered from 2.8 to 1.7 percent follow the 1Q contraction (which many attribute to weather). Tempered growth forecasts generally lower interest rate forecasts and raises concerns over market strength. Yet, given the market’s existing discount on rate expectations to the FOMC’s own estimates and the steady 2015 US GDP view, the combined yield potential and risk shift may further work in the dollar’s favor.

Moving forward, the final 24 hours of the trading week carry relatively modest economic fodder for the USD. Durable goods orders are economically important but not particularly market-moving – it carries little sway over rate expectations and broader market health. Next week, however, we are facing serious event risk. On Wednesday, there is the combination of second quarter US GDP and the FOMC rate decision. Friday brings July NFPs. Each taps readily into the rate speculation (timing and pace). With the proper surprises, they could also stir speculative currents. It should be noted that anticipation of major events can curb activity, so volatility is important to prevent a drift to the next release.

British Pound Already Down 7 Straight Days Faces UK 2Q GDP

Heading into a release that can materially upset robust interest rate expectations, the British Pound has already put in for a significant moderation. With Thursday’s retreat – the biggest in two months – GBPUSD closed its seventh consecutive bearish session and closed below 1.7000. That is the longest string of losses since January 2013 (just before the pair entered a more significant bear wave) and a level that had capped the pair for five years up until last month. This capitulation takes some of the edge off of the potential impact that the high-profile 2Q GDP release could have. Yet, despite the modest slip, the sterling is still pricing in near-perfection for BoE rate expectations. That will materially skew the potential response to data surprise. A reading that ‘beats’ will offer limited progress while a ‘miss’ could leverage losses.

Euro Ready for a Turn after Data Improves, Yields Fall, EURUSD Doji

Just a few days ago, EURUSD made significant bearish progress when it finally broke below 1.3700. Yet, the technical move didn’t rouse the bears’ commitment. In price action alone, the day following the break carved one of the smallest ranges in the Euro’s history, and this past session was a ‘spinning top’ candle (indicating indecision). Fundamentally, periphery sovereign bonds yields are moving back to lows, Euribor has leveled out and European equities are recovering ground. This may not rally the Euro, but it will curb meaningful moves lower.

New Zealand Dollar Drops Alongside Yields and Hope of September Rate Hike

The New Zealand dollar was hit hard by the RBNZ rate decision, and there was little-to-know rebound when the session was through. A rate hike is not typically a reason for a currency to lose ground; but in this instance, a hike was expected. In fact, the market was pricing in a consistent tightening regime through the foreseeable future – an unreasonable forecast given global and domestic circumstances. After the central bank mentioned a period of assessment (translation “a pause”), we find swaps now pricing in a 3 percent probability of a September hike.

Yen Crosses: Steady Inflation Further Lowers Chance of More BoJ QQE

Japanese consumer inflation figures for June were released this morning. And, everyone has mixed feelings about the data – from policy official, to citizen to trader. From the economic perspective, the economy seems to be moving steadily out of its multi-decade deflationary rut. On the other hand, that increase in prices has not found wage growth to keep pace. For the trader, taking out the need to fight inflation means that the BoJ has little room to claim mandate and build up its QQE program – the program that drove the Yen crosses 30-45 percent higher last year.

Emerging Market: Russian Ruble Fresh Sanctions and a Central Bank Decision

After a series of gains on the safe haven dollar, the Russian Ruble finally gave back ground this past session. On the newswires, the EU announced an expansion of its sanctions list. More meaningful was the IMF’s downgraded growth forecasts for 2014 (1.3 to 0.2 percent) and 2015 (2.3 to 1.0 percent). Ahead, the Central Bank of Russia is scheduled to weigh on rates. Real economic concern may lead a rate cut.

Gold Drops for Fourth Straight Session as Yields Rise

A fourth consecutive decline from gold finally brought with it some momentum. A rebound in yields and advance from the dollar diminishes the anti-currency demand while the tick higher in the S&P 500 keeps us far from the haven demand that gold could otherwise grab onto. Short of a severe UK GDP surprise, gold bugs will likely turn their attentions to next week’s US data deluge. **Bring the economic calendar to your charts with the DailyFX News App.

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-- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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