FOREX: Fed Rate Decision to Shed Light on US Dollar Outlook | Learn Forex | GoLearnForex.com

FOREX: Fed Rate Decision to Shed Light on US Dollar Outlook

Written by article default Wednesday, 22 June 2011 07:52

• Reaction to Fed Rate Decision Holds Key to US Dollar Outlook
• NZ Dollar Outperforms in Asia as Current Account Gap Shrinks

With little of note on the European economic calendar, all eyes are now looking ahead to the Federal Reserve interest rate decision due late in the session. Significant policy changes are essentially off the agenda, with the statement accompanying the announcement likely to restate what we already know: QE2 will expire in June but the balance sheet will be kept static by reinvesting proceeds from maturing securities.The pledge to keep rates low for an “extended period” seems likely to remain intact as well.

This puts the spotlight on Chairman Bernanke’s press conference following the official release, with traders most interested to see how recent hawkish posturing from Fed officials (including Plosser, Fisher and Kocherlakota) reconciles with the clear weakening in US economic data in the second quarter. To date, Bernanke and company have argued forcefully that this amounts to a temporary “soft patch” in the recovery, with growth set to reaccelerate in the second half of the year.

The markets’ reaction to whatever the Fed produces ought to prove no less telling than the actual announcement. Indeed, one can argue with equal conviction that the status quo is risk-positive because the Fed is confident enough in the strength of the US economy to pare back stimulus efforts, or risk-negative because US borrowing costs will be pressured higher in the absence of the central bank’s intervention to snuff the recovery when it is at its most vulnerable. Which side of this argument is ultimately validated through price action will say a great deal about the prospects of the US Dollar against its leading counterparts over the coming weeks.

Markets were in consolidation mode overnight, with the greenback clawing back a bit of the ground lost in the preceding 24 hours. The New Zealand Dollar narrowly outperformed, rising 0.23 percent on average against its leading counterparts after first-quarter Current Account figures showed an unexpectedly smaller deficit than economists expected. The trade gap narrowed to –NZ$0.1 billion, the smallest in a year. A pickup in risk appetite likewise helped underpin the sentiment-sensitive currency, with the MSCI Asia Pacific regional stock index following Wall Street higher to add 1 percent.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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