Currencies Down on Continued Stimulus Prospects
Forex markets were jarred mid-week as the central market event didn’t come to a conclusion until late in the Wednesday session. Most of the forex market held off on establishing new positions until the final result of the US Federal Reserve’s monetary policy decision was made public. This meeting was especiallyimportant for forex markets for a variety of reasons. Quarterly reports from the Fed give investors a voting member assessment of the economic data that has been released during the previous quarter. June meetings give traders a larger amount of data analysis and since we have the added issue of potentially ending (or phased out) stimulus programs, the overall impact on currencies was pronounced.
Because of this, price movements in the Dollar will be at the forefront of trader mindsets for the next few weeks. Each data release (employment figures, in particular) will be aligned with the overall outlook for the changes in Fed policy. Recent statements from Ben Bernanke suggest that the central bank is looking for the unemployment rate to drop to 6.5% before stimulus programs can be ended. We are still well above that number but market analysis are now starting to forecast the Fed will begin easing back on stimulus as early as September. Any additional evidence that supports this forecast will be seen as a positive for the Dollar, and a negative for currencies like the AUD, JPY, and EUR.
The Week Ahead in Forex
Next week will see a relatively limited data docket, with most of the activity centered in the Eurozone. On Monday, we will have the German IFO survey and this will be followed by the monthly jobs additions and UK GDP release in Friday. US data is relatively light (with only the Chicago PMI to watch on Friday) but in the summer months ahead, there will be a significant data docket that will guide trader expectations with respect to the Fed’s actual intentions. Most of the market’s attention will clearly be focused on the employment rate, which is still well above the central bank target of 6.5%.
Shorter term, forex traders should pay close attention to the price activity seen in the EUR/USD. Signs of economic weakness in the Eurozone have started to re-emerge, and given the promixity to the Fed’s expected stimulus scheduled, we could still see some major downside moves in this pair before the summer is through. The USD/JPY will also be important to watch, as recent bearish moves have provided some interesting buying opportunities as the pair looks to test the key psychological level at 100 once again. Commodity currencies like the AUD and CAD have also given back a good portion of their long term gains, and given their relatively high yield it would not be surprising to see traders take the opportunity to buy at current levels and re-establish the much discussed carry trade.