Euro Lower, Dollar Mixed Ahead of FOMC
Forex markets are currently trading water attempting to find direction in most cases, as traders prepare for the final results from the January FOMC meeting. The only currency that has met a steady trend in the last few sessions is the Euro, which has seen broad selling pressure against most of its major counterparts. The US Dollar, however, is another story and the greenback has been mixed –sideways against the British Pound and bearish against the Japanese Yen.
Some of the increase in activity seen early in the week should start to abate, as it will be difficult for a majority of the market to commit to large position sizes until the latest stance at the US Federal Reserve has been made public. Ultimately, what we will all be watching for are explanations of the level of confidence the Fed has in the economy. Does the Fed think growth rates can be maintained without additional monetary stimulus? Or are there still too many concerns about the underlying strength of the econom?
If the second scenario proves to be true, we will more than likely hear the Fed talk about the recent weakness in labor markets, as the last round of Non Farm Payrolls figures was well below market expectations. The figures could also be an early indication that most of the strength seen in jobs numbers last year could be coming to an end. If this is the case, it complicates matters for the Fed and makes it difficult to start withdrawing stimulus at a feverish pace.
The Week Ahead in Forex Markets: Dollar Fate Rests on Fed Stance
In the week ahead, forex traders will need to pay special attention on the extent to which the Fed is likely to continue stimulus tapering for the first half of the year. Reductions in stimulus should be Dollar positive on balance, as this essentially means that there will be fewer Dollars running through the system. Reductions in stimulus would also depend on a strengthening economic (another Dollar positive), so the Fed will likely be the body that defines the general trading tone as we head into next month.
Market volatility is likely to slow just before the meeting, as even short term traders are unlikely to be actively entering into positions before the Fed makes its final statements. But this should start to reverse strongly and lead to a volatile close into the end of the week, once we actually know what the Fed is currently thinking. Any extreme changes in viewpoints will likely have a longer term effect that could impact the trading tone for the remainder of the quarter. For these reasons, the final results this week are critical for any traders with time frames that are beyond the intraday periods. The overall stance of the Federal Reserve could have an impact on the general mindset of the other central banks as well, so there will likely be implications even for non Dollar pairs.