Most of the news coming across the wires and moving markets in early Wednesday trade has come on the back of developments out of Greece, where good progress is supposedly being made on the troika talks. Although there is no deal to speak of at this point, market participants have been starving for any form of positive news in the region and this progress is certainly welcome. Also propping sentiment in the region have been comments from Greek foreign minister Lambrindis who says that the country will avoid default and absolutely remain in the euro-zone.
While most of the major currencies are flat to moderately bid against the buck on the mild resurgence in risk appetite and demand for risk correlated assets, we are however somewhat surprised to see the Yen also so well bid, with the currency inching closer to a retest of record highs, despite the slightly risk on trade. Although Japanese officials have been quite clear that decisive action will be taken if necessary, this line from the government is not doing anything to keep Yen bulls away at the moment, and a much stronger tactic will be needed it seems to prevent further currency appreciation. Price action overall has however been somewhat strange on Wednesday, with European equities under pressure a bit while US equity futures point to a slightly higher open. Perhaps this helps to reconcile the divergence between the Yen and other currencies.
Elsewhere, the Pound is holding up rather well and is the second best performer against the buck on the day despite the release of the Bank of England Minutes which produced some dovish rhetoric. While on the face of it, the Minutes revealed no changes to the voting breakdown on rates and asset purchases, the policy consideration discussed going forward still outlined a slant to the accommodative side. Also seen throwing off Sterling bears was a weaker than expected public finance number which was overshadowed by the Minutes release. Nevertheless, we continue to expect to see this market and other currencies broadly offered on rallies so long as the outlook for the broader global macro economy remains in question.
Looking ahead, volatility is expected to lighten up ahead of the highly anticipated FOMC rate decision due later in the day. At this point, there has been a good deal of speculation as to whether a third round of quantitative easing will be implemented and it seems as though anything short of additional monetary easing will be construed as risk negative. We are of the opinion that the Fed will stop short of any formal introduction to QE3 but will at the same time appease investor concern through the mention of alternative strategies that promote appropriate stimulus to inspire recovery in the US economy. If the Fed comes out on the more dovish side then expect the market reaction to be favorable with equities seen rallying while the US Dollar sells off. However, if the Fed is more balanced with its outlook then we could see additional pressure on US and global equities, with the buck accelerating to the upside.
Joel Kruger: Joel Kruger has over 10 years of experience in the currency markets in addition to his background in law. Blending fundamental and technical analysis, Joel’s reporting considers a variety of economic and financial cross-currents to give trader a comprehensive assessment of forex market activity. Joel covers the European and Asian market sessions for DailyFX.