US Dollar Falls on Improved Risk Appetite - Fed Announcement Could Impact FX Trade on Wednesday

The US dollar generally ended Tuesday down against the majors, though the currency did manage to eke out some gains versus the Japanese yen and British pound. As it stands, a look at a daily chart of the DXY index shows that the greenback has likely made an important turn lower, but the outlook will likely continue to hinge upon risk trends as US fundamentals haven’t come into play for the currency in a while. In fact, US economic news was generally positive today, as data showed that both housing starts and building permits surged in February to 583K and 547K, respectively.

Looking ahead to Wednesday, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and this should remain the case throughout much of the year. In fact, the FOMC said on January 28 that they continue “to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Furthermore, the last statement said that the Committee's policy focus is now “to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.” As long as we see these sorts of statements continue to be published, the news shouldn’t be too market-moving. However, the statement could have an impact on risk trends if any sort of fresh initiatives are announced or if the Fed’s sentiment turns more bearish. Ultimately, any news that is positive for the stock markets may be negative for the greenback (which has been trading solely as a safe-haven asset lately), and vice versa.

Euro Consolidates Latest Gains Below 100 SMA at 1.3058

The euro consolidated its recent gains against the US dollar on Tuesday, holding in a tight range of roughly 1.2950 - 1.3025. Resistance from the 100 SMA looms above at 1.3058, suggesting a further correction lower may be possible, but ultimately EUR/USD seems likely to continue gaining in light of the bearish turn lower in the DXY index. Meanwhile, the economic view of the Euro-zone remains fairly mixed, as this morning’s release of the German ZEW survey of investor sentiment reflected a divergence in opinion on current conditions and the economic outlook. Indeed, the index of sentiment on the current situation is forecasted to fall to a more than 5-year low of -89.4 from -86.2 while the outlook actually rose to -3.5 - the best reading since July 2007 - from -5.8. Overall, the data reflects the weak status of the Euro-zone’s largest economy, but also indicates that investors hold some hope that the European Central Bank’s policy efforts will help to encourage both economic and financial market recovery.

British Pound Slides Ahead of the Bank of England’s Meeting Minutes - What to Expect

The British pound was one of the weakest of the major currencies on Tuesday, but there was little in the way of data for the UK. This will change on Wednesday though as the Bank of England’s meeting minutes tend to be a huge market-mover for the British pound upon release at 5:30 ET. During the March meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 0.50 percent, as expected. The British pound subsequently fell, but this was due primarily to the MPC’s statement which indicated that the BOE would pursue quantitative easing. As far as the minutes go, it will be important to get a sense of the MPC’s outlook because if it is more bearish than previously perceived or if some members indicated that they were open to cutting rates to zero, the news could push the British pound down below Tuesday’s lows of 1.3965. On the other hand, comments indicating that some MPC members wanted to leave rates at 1.00 percent or signs that 0.50 percent marks a floor for the Bank Rate could lead the currency up toward Monday’s highs near 1.4230.

Japanese Yen Slips Ahead of Bank of Japan Meeting - Verbal Intervention Risk?

The Japanese yen fell across the majors, as an increase in risk appetite only worked to the benefit of stocks and “risky” currencies, which essentially just excludes the “safe haven” US dollar and Japanese yen. Looking ahead, the Bank of Japan is expected to announce late on March 17 that they have left their target rate unchanged at 0.10 percent, but the release of the Bank’s monthly report at 01:00 ET on March 18 should provide more information on their view of economic conditions. Over the past few months, the BOJ’s report has reflected consistently worse economic assessments, and this may continue to be the case as the higher value of the Japanese yen takes a toll on the country’s export industry. Meanwhile, in light of the Swiss National Bank’s announcement of currency intervention on March 12, there is mounting speculation that the BOJ will announce or hint at similar measures, which would likely drive the Japanese yen even lower.

Terri Belkas is a Currency Strategist at FXCM.