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Dollar Firm Ahead of Busy Week

The U.S. dollar hovered near a six-month high against a basket of its major rivals overnight as investors braced for a very busy economic calendar week that is likely to set the tone for major currency pairs over the weeks to come. A two-day Federal Reserve monetary policy meeting, the first look at U.S. second quarter GDP, euro zone inflation and unemployment figures and the all-important U.S. employment report for July are on tap this week.  Despite the marked improvement in U.S. growth, the Fed is unlikely to change its statement this month given the lack of wage growth and still benign inflation backdrop. However, even a slight nod to recent U.S. economic strength by the Fed and/or another strong payrolls report on Friday could finally see U.S. Treasury yields and the dollar break meaningfully higher.

The euro was stuck near an eight-month trough against the greenback ahead of a very busy economic schedule this week that could see the single currency test its recent lows. While euro zone unemployment and inflation data will headline the calendar in the 18-member bloc, U.S. events and reports will likely cause the biggest waves. Indeed, a euro zone CPI reading below June’s 0.5%(y/y) would likely bring in the timeline for another round of monetary easing from the ECB. Still, the euro is likely to remain vulnerable, especially if U.S. payrolls on Friday signal that America’s labor market improvement is accelerating.

The British pound was steady against the greenback near a one-month low but hovered near its best level against the euro in nearly two-years. The pound is likely to take its cue this week from developments in the U.S. and euro zone, with little on the U.K. economic calendar that is likely to overshadow events abroad this week.

The New Zealand dollar was pinned near a six-week low after the Reserve Bank of New Zealand recent hinted that it would pause its policy tightening campaign. The Aussie was weighed down by the kiwi’s heavier tone as well.

USD: The dollar remained well bid across the board, hovering near a six-month trade-weighted high overnight. The dollar has enjoyed two-weeks of strong demand after Fed Chair Janet Yellen told Congressional lawmakers that rates could begin to rise sooner than expected if labor markets show signs of improving more rapidly. Those comments opened the door, albeit very marginally, to the possibility of rate hike by the Fed before mid-2015. They also kept the focus squarely on upcoming economic reports for any signs of an improving backdrop. This week, the Fed will make its monetary policy announcement at the conclusion of its two-day meeting on Wednesday. The statement and the subsequent press conference by Mrs. Yellen are not expected to yield any surprises. While most metrics of the economy have shown improvement, the lack of wage growth and a still benign inflation backdrop should continue to give the Fed plenty of cover to stick to its now well-worn language on the economy and rates. However, a strong reading of Q2 GDP and more importantly, another strong payrolls report on Friday could finally dislodge Treasury yields from their recent lows- a scenario that would add significant tailwind to the dollar’s rally.

EUR: The euro struggled near an eight-month low against the dollar overnight as investors continued to favor the greenback and punish the single currency based on the two currencies’ divergent policy outlook. Investors expect the Fed to continue inching closer to an exit from QE and an eventual rate hike around the middle of next year while the ECB is likely to ease monetary conditions further in the months ahead. While this week’s major events will focus on the U.S. economy, euro zone CPI on Thursday will also be closely watched. Dangerously low inflation in the 18-member bloc has forced the ECB to adopt a negative deposit rate and with recent data failing to assuage deflation fears among investors, another cooler than expected CPI print could bring in the timeline of any additional policy easing by the ECB.

GBP: The pound hovered near a one-month low against the dollar but held near a two-year peak against the euro. With little in the way of U.K. economic data this week, the pound’s direction is likely to remain driven by external developments. Investors will likely continue playing a weaker euro by going long the pound against the single currency. Barring a major move higher in U.S. yields however, the pound’s downside against the greenback should continue to remain limited.  

NZD: The kiwi struggled near a six-week low against the dollar, down nearly three percent in the last two weeks, following an RBNZ statement that signaled a pause in the bank’s policy tightening campaign. The kiwi’s very heavy tone has weighed on the Aussie over recent sessions as well.