The currency blog

Yesterday started quietly enough as the markets consolidated the previous days volatility following the downgrading of global growth by the World Bank. That was until the Euro rocketed up against the USD and sterling…surprising really considering the recent scent of unrest with European banks and ongoing questions on the debt concerns in Germany. EUR/USD picked up from 1.38 through the 1.40 level and sterling dropped to 1.1630 against the euro- so why the euro strength? The dollar should have been well positioned following the affirmation of its AAA rating and the recent swing to risk aversion…The euros gains could be attributed to comments from Weber that the ECB do not plan to expand their QE programme, or there could have been a shift to the euro ahead of the ECB’s 1st auction on their QE programme for 1-year funding at 1%. However the reason attributed in trading circles is simply down to a large order being filled and huge demand arising from a US investment bank and then overnight in Asia.

Looking at the markets this morning sterling has made good gains against the USD and recovered some ground on the euro- the lack of further equity losses being broadly sterling positive. Tonight we have the monthly meeting on interest rates in the US, the FOMC are not expected to move interest rates but they will comment on their QE measures introduced. The USD is on the backfoot as the market does not feel that the Fed can allay concerns over the QE programme. In addition the Fed will probably re-assert its position on keeping interest rates low for some time to come- again this is USD negative.

Data today already released from the OECD (Organization For Economic Co-operation and Development) says the economic outlook has improved for the first time in 2 years- good news but the report also noted that soaring unemployment and ballooning deficits could knock the recovery off its track.

Looks like its going to be another volatile day today with a weaker USD driving movements. Commodity currencies remain under pressure following Tuesdays sell-off with AUD, NZD, CAD and ZAR looking fragile. I would expect to see broad USD weakness today against the major currencies ahead of the FOMC meeting.

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