Dollar to Test Key Price Ranges

Risk aversion and rate speculations dominated a week with light economic calendar. A couple of dollar positive factors has developed throughout the week which pushed dollar sharply higher into the end. With FOMC rate decision ahead and dollar reaching key medium term resistance against majors, the coming week could be the key to determine directions for the next few months.

Market was generally volatile consolidative early last week. North Korea's missile test has pushed dollar higher against the Japanese yen which was then countered by hawkish comment from BoJ governor Fukui which said the BoJ should be decisive in rate decision and act early, even though increment may be small. But, he later qualified that acting early didn't mean earlier than market expectation. Some are speculating that BoJ could raise rate in as early as July. However, Yen's weakness later on suggest that this may not be what the majority of the market think. And, with Fukui's scandal still undergoing and pressures on the stock market still on, we believe the end of ZIRP won't be that soon, maybe in Sept, but not in July.

Sterling was a big victim last week against dollar. MPC minutes recorded another 7-1 vote for unchanged interest rates in June and the view over inflation risks was balanced. The chances of a rate hike was further dampened by the death of MPC member David Walton, who was the sole voter for hike in the previous two meetings. Despite some hawkish comments from Trichet and other ECB officials, euro remains under pressured last week as data was less than impressive and market focus was actually not there. Canadian dollar originally managed to rally against dollar on higher than expected inflation and strong retail sales but the effect was totally counted by rate speculations of US.

Riding on risk aversion and misfortune of sterling, dollar scored further higher on speculation of a 50bp hike in the coming week. Fed will announce rate decision on Jun 29. A 25bp hike to 5.25% is a done deal. While we're not taking the rumor of 50bp hike too seriously, we believe odd is high for at least another hike in Aug and even one more Sep depending on the accompany statement. Fed's stance on fighting inflation is clear. With ECB having a pace of 25bp hike every quarter, BoE still keeping rate steady and low certainty on when BoJ will end ZIRP, dollar's strength could continue to build up on further widening rate gap.

In addition to the FOMC rate decision, the coming week is also packed with other important economic indicators including Germany IFO and Eurozone sentiments; Japan inflation; Swiss KoF; US housing data, consumer confidence GDP, personal income/spending and chicago PMI. Pretty busy!