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Forex: Euro At Crossroads Ahead of FOMC, British Pound To Extend Rally
Written by article default Wednesday, 03 November 2010 12:26
Talking Points* Japanese Yen: Weakens Across the Board
* British Pound: Service-Based Activity Unexpectedly Expands At Faster Pace
* Euro: Maintains Range, Carves Out Top
* U.S. Dollar: ISM Non-Manufacturing, FOMC Rate Decision on Tap
The Euro pared the overnight decline to reach a high of 1.4058, and the exchange rate may hold steady ahead of the FOMC interest rate decision at 18:15 GMT as investors speculate the Fed to expand monetary policy further in November. As the EUR/USD maintains the narrow range carried over from October, the Fed rate decision could spark a bullish breakout in the pair as market participants expect the central bank to expand quantitative easing by at least $500B, and the policy statement accompanying the rate decision could spark choppy price action in the euro-dollar as investors weigh the outlook for future policy. However, as the recovery in the U.S. slowly gathers pace, the Fed may hold an enhanced outlook for future growth and look to gradually expand its balance sheet over the coming months as policy makers expect the rebound in economic activity to accelerate in the following year. As a result, a less-than-expected expansion in QE could generate dollar support, and lead the EUR/USD to fall back below the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3890-1.3900.
Meanwhile, the Organization for Economic Co-operation and Development said the Fed and the European Central Bank should not raise borrowing costs until 2012 as the economic outlook remains clouded with uncertainties, and encouraged them to support their respective economies going forward in order to foster a sustainable recovery. The ECB is widely expected to maintain its current policy on Thursday as the governments operating under the single-currency continue to withdraw fiscal support, and the press conference with central bank President Jean-Claude Trichet is likely to spur increased volatility in the exchange rate as market participants anticipate the Governing Council to reestablish its exit strategy over the coming months. We are likely to see the ECB maintain a cautious outlook for the region as policy makers see the marked rebound in global trade taper off, and the central bank may hold a dovish tone as it expects inflation to remain subdued over the medium-term.
The British Pound extended the rally carried over from the previous week to reach a high of 1.6155, and the exchange rate may continue to push higher throughout the week as the Bank of England is expected to hold the benchmark interest rate at 0.50% and maintain its asset purchase target at GBP 200B tomorrow. With investors scaling back expectations for further easing, the GBP/USD looks poised to test the 23.6% Fibonacci retracement from the 2009 low to high around1.6220-40, and the pound-dollar may continue to retrace the decline from earlier this year if we see the central bank hold an improved outlook for the region. Nevertheless, the economic docket showed service-based activity in the U.K. unexpectedly expanded at a faster pace in October, with the PMI advancing to 53.2 from 52.8 in September amid forecasts for a 52.6 print, and the recent batch of upbeat data could lead the BOE to revise its economic assessment as growth prospects improve.
U.S. dollar price action was mixed once again on Wednesday, with the USD/JPY tipping to a high of 80.85, and the greenback will certainly face increased volatility later today as the Fed is expected to take additional steps to stimulate the economy. The FOMC is anticipated to hold the benchmark interest rate close to zero while expanding QE by $500B, and comments following the rate decision could produce wild price action throughout the major currencies as investors mull over the prospects for future policy. Meanwhile, we have the ISM Non-Manufacturing index scheduled to cross the wires ahead of the rate decision, which is expected to show service-based activity expand at a faster pace in October, but currency traders may show a muted reaction to the data as we also have non-farm payrolls on tap for later this week.
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