The U.S. Dollar is trading higher this morning after yesterday’s volatile day and today’s Bank of England and European Central Bank Policy meetings. The lack of follow-through to the upside following yesterday’s sell-off has to be of some concern to the short Dollar traders.
On Wednesday, the Fed basically handed aggressive Dollar bears a thirty day pass when it decided to remain committed to its low interest rate policy for an “extended period” of time. This should open up the door for greater demand for higher yielding assets, but so far traders have not reacted this way.
The key to surviving current market conditions is to be able to separate economic news from trading activity. While the Fed news on paper is bearish the Dollar, traders will still be looking for value and good risk/reward opportunities. This may be why there has been no follow-through to the upside overnight in the major currency pairs. Another reason could be the European Central Bank and Bank of England policy meetings this morning.
Yesterday the Fed acknowledged the recovery has begun but indicated by its action that it wanted to see a sustained turnaround before hiking interest rates. The Fed seems to be afraid to move because it thinks it will scare the markets. At this time it doesn’t want to move too soon, but it is possible it may hold on too long.
The European Central Bank is expected to leave interest rates at 1% while issuing a statement that says it doesn’t see enough growth to warrant an interest rate hike for a long time. It may also say that it expects the recovery to be rough and prolonged. In addition, the ECB may mention the need for central banks to maintain their stimulus programs until the global economy shows a sustained recovery. Finally, other comments may mention the need to maintain a stable, less volatile currency because of a higher priced Euro’s negative impact on Euro Zone exports.
The Bank of England is the wildcard today. This is because the trading action in the GBP USD this week seems to indicate that speculators have taken out the possibility of an extension of the central bank’s asset purchase program. Since the U.K’s poor Third Quarter GDP number was released two weeks ago, traders had been pricing in the likelihood of an extension of the BoE’s $285 billion asset buyback program. This stimulus plan was designed to pump money into the economy and increase the money supply, hoping to encourage banks to make more credit available to the private sector.
Whatever the BoE does will be a market mover. If it votes to extend, then look for the British Pound to break. If it leaves it intact or cuts funding, then look for the Sterling to break 1.6700.
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