Currencies | Jun 23 2011
Forex: U.S. Dollar To Appreciate Further As FOMC Concludes Easing Cycle
By David Song, Currency Analyst
22 June 2011 12:50 GMT
Talking Points
– U.S. Dollar: Fed To Conclude QE2, Risk Aversion To Gather Pace
– British Pound: BoE Votes 7-2, Sees Scope For Additional QE
– Euro: Relief Rally Ends, Further Weakness Ahead
The U.S. dollar gained ground during the overnight trade and the reserve currency may continue to appreciate throughout the North American trade as Fed plans to unwind the additional $600B in quantitative easing. Although the Federal Open Market Committee is widely expected to maintain its zero interest rate policy in June, the shift in risk-taking behavior is likely to grip the foreign exchange market as the central bank concludes its easing cycle going into the second-half of the year.
In turn, the recent strength in the greenback should gather pace over the coming months, but currency traders may show a mixed reaction to the rate decision should Fed Chairman Ben Bernanke retain a cautious tone for the world’s largest economy. Indeed, market participants will turn their attention to the press conference with Mr. Bernanke at 18:15 GMT, and comments from the central bank head is likely to spark increased volatility in the USD as investors weigh the outlook for future policy. If the statement highlights a contingent exit strategy that will be put into motion later this year, we certainly expect to see a bullish reaction in the greenback, but dovish comments could produce whipsaw-like price action across the major exchange rates should the committee look to support the real economy throughout the remainder of the year.
The British Pound tumbled lower on Wednesday as the Bank of England policy meeting minutes revealed an increased willingness to expand monetary policy further, and GBP/USD may continue to threaten the rebound from back in March as interest rate expectations falter. Indeed, the MPC voted 7-2 to maintain its current policy in June, with some members seeing a need to expand the asset purchase program, but the committee did note that inflation could breach 5 percent before falling back towards the 2 percent target. As the U.K. faces a slowing recovery, the BoE is widely expected to support the economy in the third-quarter, but the sterling is likely to face additional headwinds over the near-term as the central bank adopts a highly dovish outlook for monetary policy. As the GBP/USD retraces the advance carried over from the previous week, the exchange rate may make another run at 1.6000, and we will certainly need to see the recovery gather pace for the central bank to lift the benchmark interest rate off of the record-low.
The Euro halted the four day rally against the greenback, with the EUR/USD falling back to 1.4344 during the overnight trade, and the single-currency may weaken further during the North American session as investors appear to be scaling back their appetite for risk. As the near-term rally fails to push the pair back above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4440-60, the euro-dollar may threaten the rebound from 1.4072, and we are likely to see the heightening risk for contagion continue to sap demands for the single-currency as European policy makers struggle to restore investor confidence. As the economic docket is expected to show a slowing recovery in Europe,we should see additional euro weakness heading into the end of the week, and the EUR/USD may make another run at 1.4000 as fears surrounding the sovereign debt crisis continues to bear down on market sentiment.
The views expressed are not FNArena's (see our disclaimer).
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