USD under heavy pressure with a big week ahead
The Dollar has begun the week broadly weaker across the board as nervous investors continue to sell the greenback ahead of tomorrow’s FOMC meeting. In the scheme of things it is unsurprising. The near certainty expected by the market is that the Fed will extend in some form the Quantitative Easing begun last year. However, the scope of such further action, and the form in which it will take (as alluded to in last week’s commentaries) has been the subject of so much speculation it is almost impossible to gauge accurately a) what the Fed will actually do, and b) the reaction of the market to said result given the divergence between the predictions of various parties. A lot of investors, it seems, would rather just get out than wait around to see the result.
All of this is proving to be a further headache to the Bank of Japan as it watches the Yen continue to appreciate against the Dollar. The JPY has borne more than its fair share of USD weakness – indeed on almost any timeframe over the last two years the JPY has risen more significantly than other G20 currencies. On Friday, the Yen hovered close to its record peak value of 79.75 Yen to the Dollar, set in 1995, with investors betting that the Bank of Japan would not intervene to weaken the Yen before the Federal Reserve makes its announcement. Indeed it is likely that the BoJ would rather keep its powder dry whilst markets interpret whatever course of action the Fed take.
In Europe, central banks in the euro zone and the UK also meet this week. Neither are expected to make any policy changes. In the case of the Bank of England it has been anticipated that it could also announce some further QE measures. However, last week’s better than expected Q3 GDP report has changed that view, with markets now anticipating that any additional policy stimulus will not happen until 2011, depending on the state of the economic recovery. This week also sees the release of the euro zone and UK manufacturing and services PMI’s for October, which will be important in terms of gauging the pace of economic recovery in both areas. Sterling is holding onto much of the gains seen versus the euro late last week, while GBP/USD has started the week above $1.60.