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• US Dollar Hits 2009 Lows on S&P 500 Strength, FOMC Up Next
• British Pound Finally Joins The Party, But BoE Minutes Loom
• Euro Sets Fresh Yearly High As Risk Appetite Reigns
• New Zealand Dollar Jumps to Fresh Yearly High - 2Q Growth Rate to Falter
US Dollar Tumbles on S&P 500 Strength, FOMC Looms Large
The US Dollar fell sharply against major forex counterparts on similarly dramatic rallies in global equity indices. Bullish developments in Asia-Pacific markets set off a chain reaction in subsequent European session trading, and speculators showed little hesitation in sending the safe-haven US Dollar Index near its lowest levels in 12 months. The combination of dollar losses and improvements in risk appetite likewise sent commodity prices through the roof—leading oil prices higher for the first day in three and gold prices just short of record highs. It seems that investors show little interest in holding US Dollars and in fact increased bets on USD weakness. According to FX Options markets, traders are willing to pay a considerable premium for USD puts against all majors except the British Pound. Tomorrow's FOMC Interest Rate Announcement report looms large on the horizon, but previous Fed rate decisions have produced fairly mixed results in the US currency.
It remains especially difficult to handicap reactions to FOMC event risk, but we suspect that the US Dollar could remain relatively unchanged absent a substantive shift in interest rate or Quantitative Easing bias. Many expected the Federal Reserve to delineate an ‘exit plan' for its $1.75 Trillion Quantitative Easing program through its August meeting. Despite a gradual improvement in economic data, however, the Fed showed little indication it would pull back its massive monetary stimulus through the foreseeable future. Officials instead announced they would gradually slow their debt purchases and extend their $300B program into October. We see relatively little reason for a sharp shift in officials' stance on policy, but traders should as always look out for the unexpected on what may be a volatile afternoon of trading.
British Pound Finally Joins the Party, But BoE Minutes Loom
The British pound finally joined in on the dollar thrashing that was being administered by the other majors as it ended a streak of three consecutive losing days. The GBP/USD would advance nearly 200 pips before stalling at the 20-Day SMA-1.6390 which may prove formidable with the BoE minutes looming. Recent sterling weakness has been founded on the central bank's consistent dovish talk, which have weighed on interest rate expectations. After, the MPC added to its quantitative easing program in August many felt that it would be the end of liquidity providing efforts, but subsequent statements and the meetings minutes revealed that the door was left open for further measures. Indeed, Governor King has also made recent comments that the central bank's deposit rate could be lowered as the committee continues to be concerned over tight lending standards. The release of September's minutes may reinforce the potential for further easing leading to a return of pound weakness. However, any hint that policy makers debated bringing an end to their asset purchase program could add to current bullish sterling sentiment. Additionally, the British Banker's Association will release their report on home loan approvals for August and is expected to show a rise to 40,500 from 38,181 which would be the highest level since February, 2008. A surge in lending could offset the potential bearish reaction from the policy meeting minutes as it could ease concerns over lending.
Related Article: British Pound Weekly Trading Forecast
Euro Sets Fresh Yearly High as Risk Appetite Reigns
The Euro pushed to a fresh yearly high of 1.4825 as traders continue to put money to work with optimism for a global recovery continuing to gain steam. Overnight we saw the Asian Development Bank raise its growth outlook for the region to 3.9% from 3.4% for 2009, while the SECO also upwardly revised their forecasts for Switzerland GDP to -1.7% from -2.7%. Equity markets traded higher across the globe on the improved outlook for global growth which helped provide support for the pair as it continues to maintain its strong correlation to risk appetite.
Improving fundamentals from the Euro-Zone have also helped provide support for the pair. Overnight ECB member Axel Weber stated There were some stronger data coming from the euro zone compared to some other regions, so I think that the behavior of the foreign-exchange markets is not out of line with these developments over the recent months. He would also reiterate the central banks' stance that interest rates are in line with current growth and inflation expectations. Tomorrow, the Euro-zone PMI reading is expected to rise to 51.3 from 50.4 as both the manufacturing and service sectors expanded for the first time since May, 2008. We may see continued support for the single currency on the bullish data but the reaction may be limited with the FOMC rate decision looming.
Related Article: Euro Weekly Trading Forecast
New Zealand Dollar Jumps to Fresh Yearly High - 2Q Growth Rate to Falter
The New Zealand dollar surged to a fresh yearly high of 0.7246 against the greenback to lead the commodity currencies higher, and the kiwi is likely to face increased volatility going into the Asian trade as economists forecast economic activity in the isle-nation to contract 0.2% in the second quarter. However, the economic docket showed New Zealand's current account unexpectedly increased to NZ$0.124B from a revised reading of -NZ$0.681B during the first three-months of the year, and the surge in capital inflows should help to taper the economic slump as policy makers anticipate growth prospects to improve throughout the second-half of the year. At the same time, an unexpected drop in retail sales weighed on the Canadian dollar and tempered the appreciation in the loonie as market participants continue to weigh the prospects for a sustainable recovery. Consumer spending in Canada slipped 0.6% in July amid expectations for a 0.7% rise as gasoline receipts plunged 3.4% during the month, while discretionary spending on food and beverages slumped 1.5% after rising 0.9% in June, and households may continue to curb their rate of consumption as they face a weakening labor market paired with tightening credit conditions.
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Written by: The DailyFXTeam