The dollar has strengthened overnight

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The dollar has strengthened overnight against the Euro, the Yen and Sterling on the back of the Federal Reserve cutting growth forecasts, not signalling further stimulus and confirming it was ceasing it’s $600 Billion Bond buying programme by the end of June. This resulted in Dollar buying from Asian Sovereign players. By saying they were not signalling further stimulus coupled on the same day as the Bank of England announcing that it may look to offer more stimulus, or QE as it’s widely referred to in the press, has pushed Sterling to a three month low against the Dollar. The Fed reiterated that they’ll keep interest rates near zero for an “extended period”.

Chairman of the Fed Ben Bernanke has said that the recovery is progressing “more slowly” than expected. This is the same terminology that was used in the last meeting showing that the Fed acknowledges that the first half of the year has been disappointing. On the employment side in April they said that the labour market was “improving gradually” however in June they’ve had to say that data has been weaker than expected, acknowledging that they’re behind on their employment mandate. Ben Bernanke has however left the possibility open for further stimulus should the economic turnaround he expects to materialise not pan out.

Unless we see an abrupt downturn in the US economy, more disappointing employment data, housing figures deteriorating, then I don’t think we’ll see “Q3”. Things will remain tough for the large amount of unemployed and underemployed people in the US until a significant uptick in the economy. The US did post growth of 1.8% in the first quarter of 2011 however this is down from 3.1% in the fourth quarter of last year.

A default by Greece is still viewed as a risk to the US as it will cause disruption globally to stocks, bonds and financial markets in general. We have the Economic Finance Ministers meeting today in Brussels where there will be more discussions on Greece. A short term fix may be resolved however it’s more “plasters and bandages” rather than a long term surgical fix. We’ve had the Purchasing Managers Index Services and Manufacturing data out this morning from the EMU which came in at 54.2 and 52 respectively against consensus figures of 55.3 and 53.8. We’ve seen slight Euro weakness on this release.

We have Jean Claude Trichet speaking this afternoon which will provide some volatility as well as New Home Sales out of the US.

Sterling over the last two days has become the ugly boy of Europe, quite remarkable considering the goings on in Greece. The fact the Bank of England signalled that interest rates won’t rise for the foreseeable future and indicating that they’d prefer to introduce more QE as an alternative seen Sterling become the worst performing currency yesterday.

The prospects for GBP/EUR are firmly tied to developments in Greece I feel. The Economic Finance Ministers meeting today will try and come up with a workable plan for the Greeks to give the markets some direction and also reassure Greece that the EU can help them avoid a default and lead them to some sort of financial resurgence. As I’ve said, and many others, it’s a patchwork fix for Greece.

I believe we’ll see a retracement on GBP/EUR once the Greece situation play’s out however it’ll be a bumpy road for Sterling in the interim. If we see an uptick to 1.13/1.14 and you have some exposure it is worth thinking about hedging some of your exposure to protect any further downside risks. It’s the old adage, but if you don’t do anything then in effect you’re speculating.

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The dollar has strengthened overnight

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