EUR/USD has hit a monthly high of 1.3130. The FOMC (The Federal Open Market Committee) delivered low rates saying monetary policy will retain its easing stance with the federal funds rate expected to stay low through 2014. The FOMC retained their position for expectations of moderate growth and subdued inflation over the coming quarters. With expectations of moderate growth, unemployment levels, as a consequence, will decline only gradually. Interest rates down the line are dependent on the outcome of growth and inflation. The FOMC has decided on ‘easier policy’ for a longer period, and has opened the door to, yep, you guessed it, ‘QE3’. So, what does this all mean for the Dollar? The dovish tone of the meeting evidently put the dollar under pressure immediately afterwards with a shift to risk sensitive currencies and a sharp sell off in the dollar. The US Dollar has been in the ‘ugly parade’ along with the EUR for a long time but with the EUR having fallen out of the ugly tree and hitting every branch on the way down to the parade the US dollar has been given a fairly ‘easy ride’ to coin an American phrase. I think over the next trading sessions (Thurs/Fri and possibly Monday) we’ll see some currency rallies against the US Dollar. EUR/USD in my view could test the 1.32/1.33 level. However, I don’t envisage these rallies to have momentum of great length. As stated previously I think this year will be a story of dollar strength as a good deal of risk has not been priced in outside of the United States and many economies may have to contend with additional accommodation from their central banks. This should, in my opinion, result in dollar strength. I would say once we hit the 1.32/1.33 level we’ll see a sell off, and a retracement to levels of 1.20 this year. I wouldn’t be surprised to see this in the next few months. There will of course be intraday movements in both directions in the interim as nothing ever goes in a straight line.
If you’re a buyer of USD I’d think about considering covering off some of your exposure at these elevated levels by month end. GBP/USD looks particularly attractive at the moment to secure some US Dollars on a one/two month forward to hedge some of your risk.
Whilst the USD may have taken the ugly prize at the parade yesterday the EUR will be fighting to regain its crown today. After the FOMC meeting the market focus will once again, go on, have a guess, turn back to Greece. Private creditors resumed talks yesterday on the bond swap deal and a Greece spokesman intimated to the press that negotiations should be completed by the end of the week. Should we see an agreement reached that would prevent a Greece default we could see some EUR strength short term, that would, as stated above, push the EUR/USD cross upwards to target the 1.32/133 level. These short term upticks in the EUR are nothing more than this – everyone expects dreadful developments/data/releases from the Eurozone so any positive news pushes the EUR higher and quicker than it actually should. Once we’ve had these sharp upticks on EUR crosses the market says “hang on a minute; there is still massive systemic risk; risks of contagion, fractured political and economic thinking, no growth, unsustainable debt levels etc etc”. We’ll then see the EUR come off and resume its downward trend to 1.20 on EUR/USD which in turn will push GBP/EUR higher.
What for Sterling? We’re relatively range bound on GBP/EUR at present. 1.20 is looking toppish on this cross, at present. If you’re a buyer of EUR in the next week or so I’d look to put a market order in at 1.20 and secure at this level. Yes, it’s been higher however with Greek talks continuing and if they do agree a deal you could see EUR strength pushing GBP/EUR lower, short-term. GBP from the markets perspective is a bystander at present and heavily reliant on other currency moves for direction.
We’re limited on the data front from the UK and Europe this morning with nothing of any note to report. The US session will be the focus again with Durable Goods Orders out at 13.30 (UK time) which gives us an indication of the cost of orders received by manufacturers for durable goods (goods planned to last for three years or more). As these orders are normally for cars, appliances etc they involve large investments so are sensitive to the US economic situation. We’ll see volatility on USD crosses this afternoon. We also have New Home Sales out and Initial Jobless claims although these are minor releases.
With the data out this afternoon, and in my view, short term USD weakness if you’re a buyer of USD and seller of GBP I’d look at market orders this afternoon on GBP/USD to try and secure the top of the trading range today. Please contact to discuss implementing market or forward contracts.
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