Forex: Dollar Looks to Industrial Production Data to Set Tone for FOMC

Talking Points

• US Dollar Sold, Aussie Outperforms as Summers Opts Out of Fed Job

• Eurozone CPI Drop Unlikely to Put Significant Pressure on the Euro

• US Industrial Production Data to Set Tone for FOMC Announcement

The US Dollar gapped lower against its leading counterparts to start the trading week after Lawrence Summers withdrew his candidacy to take over as Chairman of the Federal Reserve after Ben Bernanke concludes his term in January of next year. Summers was seen as a more hawkish alternative to the other leading contender for Bernanke’s job, current Fed Vice-Chair Janet Yellen. As such, his exit from the contest sent the US unit lower and offered a lift to risk sentiment, with the MSCI Asia Pacific regional benchmark stock index rising 1.3 percent. The Australian Dollar outperformed in the FX space, adding as much as 1.6 percent against its US namesake, and we remain long AUD/USD.

Later in the day, the spotlight turns to the US Industrial Production report, where output is set to increase 0.4 percent. That would amount to the strongest gain in six months. Traders are likely to interpret the data in terms of its ability to set the tone for Wednesday’s closely-watched FOMC announcement. The outing is expected to produce the first “taper” of the QE3 stimulus program, with the baseline scenario calling for a $10-15 billion cutback in monthly asset purchases. The path forward beyond that remains highly uncertain however, offering plenty of fodder for speculation. With that in mind, news-flow that argues in favor of a sustained QE reduction cycle into the end of the year is likely to boost the greenback (and vice versa).

The final revision of Augusts’ Eurozone CPI reading headlines the economic calendar in European hours. Expectations call for the headline year-on-year inflation rate to print at 1.3 percent, in line with flash estimates and down to the lowest in four months. All things being equal, a soft inflation print would typically bode ill for the Euro in that it would encourage ECB interest rate cut speculation. Significant selling pressure seems unlikely to emerge however considering economic news-flow out of the single currency area has increasingly outperformed relative to expectations since late April, suggesting the central bank is probably in no hurry to offer additional stimulus.

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Asia Session:

GMT	CCY	EVENT	ACT	EXP	PREV
21:45	NZD	REINZ Housing Price Index (AUG)	3746.6	-	3669.1
21:45	NZD	REINZ House Price Index (MoM) (AUG)	2.1%	-	-0.5%
21:45	NZD	REINZ House Sales (YoY) (AUG)	8.5%	-	14.7%
22:00	NZD	Westpac NZ Consumer Confidence (3Q)	115.4	-	116.6
22:30	NZD	Performance Services Index (AUG)	53.2	-	58.2
23:01	GBP	Rightmove House Prices (YoY) (SEP)	4.5%	-	5.5%
23:01	GBP	Rightmove House Prices (MoM) (SEP)	-1.5%	-	-1.8%

Euro Session:

GMT	CCY	EVENT	EXP/ACT	PREV	IMPACT
9:00	EUR	Eurozone CPI (MoM) (AUG)	0.1%	-0.5%	Medium
9:00	EUR	Eurozone CPI (YoY) (AUG F)	1.3%		High
9:00	EUR	Eurozone CPI - Core (YoY) (AUG F)	1.1%	1.1%	High
9:00	EUR	Eurozone Labor Costs (YoY) (2Q)	-	1.6%	Low

Critical Levels:

CCY	SUPP 3	SUPP 2	SUPP 1	Pivot Point	RES 1	RES 2	RES 3
EURUSD	1.3156	1.3223	1.3258	1.3290	1.3325	1.3357	1.3424
GBPUSD	1.5630	1.5738	1.5807	1.5846	1.5915	1.5954	1.6062

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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