• USD pulled back gains on renewed confidence in Europe ahead of the FOMC meeting

• JPY weakened further against the USD and stabilizing above the 95 level

• Commodity currencies rebounded as the market pulls away from safer assets

USD – The US dollar is broadly weaker against most major currencies with the exception of the JPY, as market participants rebounded from yesterday’s sell-off in riskier assets ahead of the FOMC policy statement at 11:00am PT and Chairman Bernanke’s news conference at 11:30am PT today.  Despite the probability of a more upbeat economic assessment than in January, expect no changes in the Fed’s current policy or voting pattern in regards to asset purchases and interest rates.  Members have planned a “review” of asset purchases for this meeting, and it is possible that they will give more insight into the preconditions to slowing or stopping the $40bn – MBS / $45bn – Treasuries monthly purchasing pace.  In Bernanke’s recent semi-annual testimony, he asserted that the “benefits of QE still outweighed the costs”. However, at some point, the benefits will have accrued enough and the costs will have escalated enough to tip the balance towards slowing or stopping QE. Speculation that the Fed could begin winding down asset purchases could send mixed messages and add more uncertainty to the direction of the USD in the near-term.

EUR – The euro rebounded from reaching a four-month low against the dollar yesterday as worries about Cyprus eased. However, the EUR remains vulnerable given the underlying uncertainty in the region and the potential risk that the occurrence in Cyprus could reach other troubling euro zone countries like Spain and Italy. Still in despair, Cyprus has sought Russia's help to come up with 5.8bn euros after its parliament rejected the proposed levy on bank deposits, a condition for the bailout. Many investors are confident that a deal with Russia will be met, influencing the market to buy in on the earlier EUR/USD rally.

GBP – Sterling is climbing higher against the dollar after minutes from the last BoE policy meeting showed policymakers were still a split 6-3 on further asset purchases. The BoE minutes, which some were expecting to show a closer vote, also revealed concerns that further quantitative easing would lead to more sterling weakness and add to inflationary pressures. Fundamentally, a steer away from further injection could lend some support for the GBP. However, adding near-term pressure to the pound is a recent statement by British finance minister George Osborne, who in his annual budget presentation, said that Britain will borrow more in the coming years than official forecasts showed in December and as such will miss one of its two debt targets by another year. According to the latest forecast from the Office for Budget Responsibility, Britain’s deficit would stand at 7.4% of GDP in 2012-13, to 6.8% of GDP in 2013-14 and to 5.9% of GDP in 2014-15. Osborne also said the chances of meeting his proposed target has deteriorated and the goal would now be pushed to 2017-18.

JPY – The Japanese yen weakened further against the dollar as the market stays wary of any comments from Haruhiko Kuroda, who becomes governor of the BoJ today. Expectations are high that the BOJ will embark on a much more aggressive monetary policy to fight deflation. The USD/JPY is ranging between 94.81-95.64 and could breach the 96.70 resistance level reached on March 12th. 

Commodity Currencies – The Canadian dollar strengthened against the greenback, ahead of the FOMC meeting and as the market awaits a potential deal between Europe and Cyprus.  Look for the CAD to hold above the 1.0200 level as the currency remains under pressure with mixed domestic data.  The Australian and New Zealand dollars held close to yesterday’s levels against the dollar and pushed higher, hitting 10-week highs against the euro after the rejection of the Cypriot bailout.  The aussie has benefited from its economy's limited exposure to Europe and its triple-A rated government debt.  The kiwi held close to yesterday’s levels despite New Zealand's annual current account deficit rising to a 3-1/2-year high in December.  The market will look towards tomorrow’s release of GDP data out of New Zealand for further direction into the kiwi and aussie.