Dollar Supported by Fed Officials Comments, But Cautious on Senate Tax Plan

Trading remains rather quiet in the forex markets this week so far. Dollar was supported by upbeat comments from Fed officials regarding a new term rate hike. Jerome Powell also indicated that he preferred continuity when taking over the Fed chair job. But Dollar traders stay cautiously watching how the Republican’s tax plan will work out in the Senate this week. Meanwhile, Euro also lost some upside moment ahead of the grand coalition talk between CDU/CSU and SPD. Yen also lacks conviction in this week’s rally attempt.

Trading remains rather quiet in the forex markets this week so far. Dollar was supported by upbeat comments from Fed officials regarding a new term rate hike. Jerome Powell also indicated that he preferred continuity when taking over the Fed chair job. But Dollar traders stay cautiously watching how the Republican’s tax plan will work out in the Senate this week. Meanwhile, Euro also lost some upside moment ahead of the grand coalition talk between CDU/CSU and SPD. Yen also lacks conviction in this week’s rally attempt.

Powell expects interest rates to rise and balance sheet to shrink

Fed chair nominee Jerome Powell released a statement to the Senate Banking Committee before his confirmation hearing today. Powell said in the statement that Fed policy makers "expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink." Adding to that, he emphasized "while we endeavour to make the path of policy as predictable as possible, the future cannot be known with certainty." So far, Powell sounded like he would like maintain continuity from the Yellen era. But we may read deeper into his mind in the Q&A session today.

Dallas Fed Kaplan: Appropriate to hike in the near future

Dallas Fed President Robert Kaplan said that " it will likely be appropriate, in the near future, to take the next step in the process of removing monetary accommodation." And, "this should be done in the context of an overall strategy of removing accommodation in a gradual and patient manner." Kaplan warned that "if we wait too long to see actual evidence of inflation, we may get behind the curve and have to subsequently raise rates more rapidly." He added that "this type of rapid rate rise has the potential to increase the risk of recession."

NY Fed Dudley: Not concerned with inflation a little below target

New York Fed President William Dudley expressed that he’s "not particularly concerned that inflation is a little bit below target." He pointed out that unemployment has fallen to 4.1% percent and reached "full employment. And with that unemployment rate, inflation would be prompted up. And there, "we have been gradually raising interest rates."

Merkel ready to compromise in grand coalition talk

In Germany, Chancellor Angela Merkel talked about the coalition with SPD in her CDU headquarters yesterday. She emphasized that "people expect their problems to be solved, and we believe that the best way to achieve that is by forming a stable government." And, "that’s why we are ready to begin talks with the SPD. We of course know that such talks require compromise." SPD leader Martin Schulz continued to sound open as he said in a press briefing that "we are entering into talks, and we don’t know where they’ll lead," but "no option is off the table." Merkel will meet with SPD leader Martin Schulz, CSU leader Seehofer and President Frank-Walter Steinmeier on Thursday, on reformation of the grand coalition.

On the data front

Germany will release import price index and Gfk consumer sentiment in European session. Eurozone will release M3. Canada will release IPPI and RMPI later in the data. US will release wholesale inventories, trade balance, and house price indices. But Conference Board consumer confidence is the more important one to watch.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2708; (P) 1.2739; (R1) 1.2799; More….

USD/CAD’s correction from 1.2916 is still in progress and intraday bias stays neutral. Deeper decline could still be seen. . But we’d expect downside to be contained by 1.2598 resistance turned support and bring rebound. Above 1.2836 minor resistance will turn bias back to the upside for 1.2916 first. Further break of 1.2916 will resume whole rally from 1.2061 to 38.2% retracement of 1.4689 to 1.2061 at 1.3065. However, sustained break of 1.2598 will argue that rebound from 1.2061 has completed after hitting 55 week EMA (now at 1.2895). Near term outlook will be turned bearish in this case.

In the bigger picture, USD/CAD should have defended 50% retracement of 0.9406 (2011 low) to 1.4689 (2016 high) at 1.2048. And with 1.2048 intact, we’d favor the case that fall from 1.4689 is a correction. Rise from 1.2061 medium term bottom should now target 38.2% retracement of 1.4689 to 1.2061 at 1.3065. Firm break there will target 1.3793 key resistance next (61.8% retracement at 1.3685). We’ll now hold on to this bullish view as long as 1.2450 support holds.

Economic Indicators Update