USD Outlook Hinges On Fed Policy, Euro Relief Rally Losing Steam

 
on September 13 2012 9:09 AM

Talking Points

  • U.S. Dollar: FOMC To Implement QE3, Extend Interest Rate Pledge
  • Euro: ECB 'May Do Nothing' Even As Economic Activity Remains Weak
  • British Pound: Outlook Remains Bullish As BoE Softens Dovish Tone

U.S. Dollar: FOMC To Implement QE3, Extend Interest Rate Pledge

The greenback is struggling to hold its ground on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) paring the overnight advance to 9,840, and the reserve currency may weaken further during the North American trade as the FOMC is widely expected to ease monetary policy further in September.

Indeed, market participants are looking for another large-scale asset purchase program amid the slowing recovery in the world's largest economy, while there's speculation that the central bank will also extend its zero-interest rate policy (ZIRP) pledge out to 2015 as the committee continues to rely on its transmission mechanisms to tackle the downside risks for growth and inflation. However, the rate decision may reveal a growing rift within the FOMC as there remains a limited risk for a double-dip recession, and we may see the central bank hold off on QE3 and merely extend its ZIRP forecast as the fundamental outlook for 2013 deteriorates.

As the FOMC interest rate decision takes center stage, the outcome will heavily influence price action over the remainder of the week, and we will need to see the FOMC go against market expectations to see the USDOLLAR retrace the sharp decline from earlier this month.

Euro: ECB 'May Do Nothing' Even As Economic Activity Remains Weak

The Euro fell back from 1.2930 as European Central Bank board member Panicos Demetriades argued that the Governing Council 'may do nothing' with the new bond-purchasing program, but the new initiative may only help to buy more time as the region faces a deepening recession.

Indeed, Mr. Demetriades argued that 'no one will speculate against the unlimited firepower of a central bank' as the central bank continues to embark on its non-standard measure, but we may see the ECB continue to delay the Outright Monetary Transactions (OMT) program as the conditionality tied to the new initiative comes under increased criticism. Nevertheless, the ECB's monthly report continued to endorse the OMT, stating that the new program 'will enable us to address severe distortions in government bond markets,' but the Governing Council may have little choice but to implement a range of policy tools over the coming months as 'economic growth in the euro area is expected to remain weak.'

As the EURUSD remains overbought, the short-term pullback in the exchange rate may ultimately turn into a larger correction, but we will need to see the relative strength index fall back from overbought territory to see the pair carve out a short-term top in September.

British Pound: Outlook Remains Bullish As BoE Softens Dovish Tone

The British Pound gave back the advance to 1.6124, with the relative strength index flattening out around the 74 figure, and the sterling looks poised for a short-term correction following the marked appreciation for earlier this month.

However, Bank of England board member Ben Broadbent sounded more hawkish during an interview with the Northern Echo newspaper and warned that 'inflation is higher than we'd expect,' and it seems as though the Monetary Policy Committee will stick to the sidelines over the remainder of the year as the central bank now sees narrowing risk of undershooting the 2% target for price growth. The shift in the policy outlook continues to foster a bullish outlook for the medium-term, and the sterling may continue to outperform against its major counterparts as the BoE gradually moves away from its easing cycle. In turn, we will look to buy dips in the GBPUSD, and the pair may fall back towards former resistance around 1.5740-50 to test for interim support.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

16:30

12:30

Federal Open Market Committee Interest Rate Decision

0.25%

0.25%

USD

18:00

14:00

FOMC Publishes Economic, Rate Projections

USD

18:00

14:00

Monthly Budget Statement (AUG)

-$155.0B

-$134.1B

USD

18:15

14:15

Fed Chairman Ben Bernanke Press Conference

NZD

22:45

18:45

Food Prices (MoM) (AUG)

0.2%

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Will the EUR/USD Resume the Downward Trend From 2011? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

Share this article

More News from IBT MEDIA