Talking Points

• Dollar Has Scope to Rise Unless Fed Chatter, US Data Adds New Fuel to QE3 Bets
• Aussie Dollar Lags on Disappointing Chinese Industrial Profits Data in Asian Trade

TheUS Dollar (ticker:USDollar) corrected narrowly higher in overnight trade as the greenback digested a 0.4 percent drop over the preceding 24 hours that brought the benchmark currency to the lowest in three weeks. TheAustralian Dollar underperformed after China’s Industrial Profits fell 5.2 percent in the 12 months through February, marking the first annualized decline since August 2009.

Looking ahead, a quiet economic calendar in European hours is likely to keep the focus on US monetary policy expectations. Stocks rose while the Dollar tumbled yesterdayafter Federal Reserve Chairman Ben Bernanke said accommodative monetary policy was needed to stoke improvement in the labor market, fueling hopes that a third round of quantitative easing (QE3) may be in the cards. A disappointing set of US economic data offered a fitting backdrop for the Fed chief’s comments.

With this in mind, the spotlight turns to the Conference Board’sUS Consumer Confidence gauge and theRichmond Fed Manufacturing Survey index. Both measures are expected to pull back in March, likely reflecting February’s run-up in oil prices. A busy Fed speaking calendar is likewise on tap, with FOMC membersBill Dudley andElizabeth Duke – both of whom lean to the dovish side of the policy spectrum –scheduled to come across the wires. Ben Bernanke is also scheduled to give the third of a series of lectures at George Washington University, although the first two outings didn’t prove to contain market-moving content.

On balance, this seems to set the stage for a repeat of yesterday’s price action. The markets are noticeably unwilling to commit to directional momentum however, withS&P 500 stock index futures flat in overnight trade. This warns that investors may not be quite as sold on the prospects for QE3 as yesterday price action would suggest. Indeed, Bernanke’s mention of accommodative monetary policy need not have referred to asset purchases at all and may have been aimed at the pledge to keep rates low through late 2014.

This hints to the possibility for a reversal as yesterday’s move begins to look overdone and a correction ensues. The likelihood of such an outcome depends squarely on the ability of the US calendar to meaningfully advance the argument that growth is faltering and additional stimulus is an active point of discussion at the central bank. Outcomes in line with the tone set on Monday are unlikely surprise at this point and so may not prove adequate to fuel follow-through, whereas upside surprises stand to trigger sharp snap-back as markets backpedal.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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