Dollar Holds Steady After Euro Vote Relief, Before Fed Decision

• Dollar Holds Steady After Euro Vote Relief, Before Fed Decision
• Euro Shows Little Reaction to Greece Confidence Vote, Reality Setting In
• British Pound: Are the BoE Minutes a Market Moving Event?
• Canadian Dollar Rallies Across the Board after Positive Growth Figures
• Japanese Yen Holds its Advantage to the Dollar as Yields Trend
• New Zealand Dollar Short-Term Yields Slowly Recovering
• Gold Eyes 1,550 and Then Record Highs as US Stimulus Comes Into View

Dollar Holds Steady After Euro Vote Relief, Before Fed Decision

Pressure was building for the US dollar Tuesday; but the possible catalyst for a sharp breakout (for the greenback and potentially the broader market) ultimately fell flat. Though the Greece confidence vote directly affects the financial future of the Euro Zone; the dollar and euro are the first and second most liquid currencies respectively. When one currency moves aggressively, the other typically matches pace while moving in the opposite direction. We should not downplay the influence EURUSD has over the general strength of the benchmark currency; but it is no longer the most immediate threat to market stability. Now, we move on to the FOMC rate decision and Chairman Ben Bernanke's press conference shortly after the announcement.

Heading into the new trading day and considerable event risk, we need to assess the market's bearings. The Dow Jones FXCM Dollar Index has slowly retraced gains this past week after posting a sizable advance. The tempered pace of this underlying measure of health is a good reflection of performance; because where EURUSD has shown significant anti-dollar progress, GBPUSD has shown a more restrained advance while USDJPY and AUDUSD have shown themselves to be virtually unmoved. This comparison points to influence through crosswinds from European fundamentals; while the greenback itself is relatively stable. At the same time, risk appetite how shown significant strength as the S&P 500 returns now stands just below 1,300 while Asian and European indexes jump from support. We are taking note of the dollar's health as well as risk appetite trends because the Fed rate decision we face tomorrow carries substantial influence for both.

On a snap analysis basis: will the rate decision and subsequent press conference by Bernanke jumpstart a new trend? Unlikely. For the policy announcement itself (due at 16:30 GMT), the central bank will not change its benchmark rate nor will they significant alter their stimulus programs. The statement could offer a few notable highlights considering we are coming to the end of the second Quantitative Easing (QE2) effort; but the Fed Chairman will more likely provide the better insight on this transition. This is only the second time that the policy authority has held a post-meeting forum; and the timing with the end of the stimulus buildup presents a clear opportunity for the policymaker to use the transparency effort to warn of a shift in approach. However, the group has made a concerted effort to slowly transition and wean the markets off government support. The most likely scenario for the commentary is the suggestion that QE2 will mark the end of the Fed balance sheet build up; but all options will be left open. The question is: how much dependency in dollar shorts and risk building is based on a QE3?

Related:Discuss the Dollar in the DailyFX Forum, John's Picks: A Short-Term Approach is Best for Still Appealing EURUSD, GBPUSD Setups

Euro Shows Little Reaction to Greece Confidence Vote, Reality Setting In

Speculation can significantly alter the trading landscape for any currency or asset. When there is an underlying sense of confidence or perhaps a preoccupation with a specific aspect of a trade, it is easy for the market to weather concerns that crowd out the headlines or would otherwise threaten losses. The euro has found itself capable of fighting the tremendous headwinds that it faces with Greece troubles deepening and spreading as the market preoccupies itself with higher yield and a little extra time to collect. With the Greek confidence vote that was held late in this past US session, it was the first line-in-the-sand that could snap the markets to reality. Instead, a pass would keep Prime Minister Papandreou at the helm and bought a little more time until the medium-term budget vote next week. And, from there, the EU needs to agree to extend its support of the off-course member at the July 3rd meeting. The chance of a default is still very high; but when will market reflect that?

British Pound: Are the BoE Minutes a Market Moving Event?

Through Tuesday's session, the pound posted an uneven performance that tipped towards larger losses. The narrowed deficit in May (15.2 billion pounds) did little to quiet concerns that the UK would struggle to meet year-end budget goals given slowing growth. In the upcoming session, we are focusing on the BoE minutes. That said, we have not seen any progress on the balance of hawks and doves in many meetings.

Canadian Dollar Rallies Across the Board after Positive Growth Figures

The Canadian dollar put in for a rally across the board through Tuesday's session owing to the encouraging fundamentals on the docket. The April retail sales figures were weaker than expected; but the 0.3 percent increase was still a contribution to growth. The 1.0 percent increase in the Leading Indicators composite was another boon. In the upcoming session, we will watch the BoC's financial review.

Japanese Yen Holds its Advantage to the Dollar as Yields Trend

Why is the Japanese yen able to hold so close to record highs against the US dollar even though risk trends are rousing and speculation of QE2 closing builds? For USDJPY, the concept of risky currency and safe haven currency has been diminished; while long-term issues like fiscal strength have receded. In the meantime, the US-Japan 2-year bond yield spread is hovering just off a recent record low.

New Zealand Dollar Short-Term Yields Slowly Recovering

Risk appetite has been a boon for the New Zealand dollar. While there are certainly a number of financial concerns around the global markets (Chinese markets stalling, European debt crisis, etc); the New Zealand dollar's yield doesn't seem to be at direct risk from any one development. In the meantime, we should note that the short-term, one-week Libor rate is starting to edge up from its near-two year low set last month.

Gold Eyes 1,550 and Then Record Highs as US Stimulus Comes Into View

The Greece no confidence vote was a good opportunity to stir the kind of risk aversion that would benefit gold. Yet, we wouldn't see the panicked flight from the Euro Zone that would encourage traders to abandon all things debt and deficit to find safety in the precious metal. With the Fed meeting, the risk is the opposite. A more hawkish bearing from Bernanke would raise US rates and thereby the dollar's appeal.

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ECONOMIC DATA

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INTRA-DAY PROBABILITY BANDS 18:00 GMT

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Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

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