Forex: U.S. Dollar Rallies On Flight To Safety, FOMC Rate Decision Could Spur Mixed Reactions

DailyFX

Mar 15, 2011, 11:52 PM

Talking Points

British Pound: Maintains Range From February
Euro: ECB Sees Need For Increased Governance
U.S. Dollar: TIC Flows, FOMC Rate Decision On Tap

Market sentiment remained battered on Tuesday, with the U.S. dollar benefitting from the flight to safety, and the near-term rally in the greenback may gather pace throughout the North American trade as risk trends continue to dictate price action in the currency market. As currency traders scale back their appetite for risk, the EUR/USD should continue to retrace the advance from earlier this month, but the Federal Open Market Committee interest rate decision could shake up the currency market as the fundamental outlook for the world’s largest economy remains clouded with high uncertainty.

The Fed is widely expected to maintain its current policy in March in an effort to stem the downside risks for growth and inflation, and dovish comments from the central bank could bear down on the exchange rate as the committee leaves the door open for another round of quantitative easing.

The sharp reversal in the EUR/USD is likely to gather pace as the near-term rally fails to produce a test of the monthly high (1.4035), and the heightening risk for contagion may continue to bear down on the exchange rate as the European Union struggle to meet on common ground. European Central Bank President Jean-Claude Trichet said that the EU’s economic governance proposal is “insufficient” to fully address the weaknesses in the current system while speaking in Brussels, and European policy makers could be forced to step up their efforts as they weigh different alternatives to address the sovereign debt crisis.

As the EU struggles to restore investor confidence, the EUR/USD may continue to work its way towards the 20-Day SMA at 1.3811, but the pair may hold steady ahead of the FOMC rate decision at 18:15 GMT as market participants weigh the prospects for future policy.

The British Pound bounced back from a low of 1.5977 to maintain the range from earlier this month, and the GBP/USD may continue to trend sideways ahead of the Bank of England policy meeting minutes due out on March 23 as investors speculate the central bank to gradually normalize monetary policy over the coming months. As the pound-dollar breaks out of the upward trend from earlier this year, the exchange rate is likely to consolidate going forward, and currency traders may have an opportunity to take advantage of the range-bound price action as the pair remains capped by the 20-Day SMA at 1.6178.

Nevertheless, the BoE minutes could reveal a growing shift within the MPC as price growth in the U.K. continues to gather pace, and hawkish comments from the central bank could produce a sharp rally in the exchange rate as interest rate expectations accelerate.

As the U.S. dollar benefits from safe-haven flows, the near-term rally in in the greenback may gather pace throughout the North American trade, but the greenback may continue to underperform against the Swiss franc and the Japanese Yen as the flight to safety continues. However, the sharp appreciation in the reserve currency may slow ahead of FOMC interest rate decision as the central bank maintains a cautious tone for the world’s largest economy, but the Fed may strike an improved outlook for growth and inflation as the economic recovery gradually gathers pace.

In turn, market participants may show a mixed reaction to the rate decision as the earthquake in the Asia/Pacific takes centre stage, and the greenback may hold its ground going into the middle of the week as risk aversion continues to flow into the currency market.

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Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: [email protected]

FX Upcoming

Currency

GMT

EST

Release

Expected

Prior

CAD

12:30

08:30

Labour Productivity (QoQ) (4Q)

0.3%

0.1%

USD

12:30

08:30

Empire Manufacturing (MAR)

16.00

15.43

USD

12:30

08:30

Import Price Index (mum) (FEB)

0.9%

1.5%

USD

12:30

08:30

Import Price Index (YoY) (FEB)

6.5%

5.3%

USD

13:00

09:00

Total New TIC Flows (JAN)

—

$48.2B

USD

13:00

09:00

Net Long-term TIC Flows (JAN)

—

$65.9B

USD

14:00

10:00

NAHB Housing Market Index (MAR)

Currency

GMT

Release

Expected

Actual

Comments

AUD