U.S. Dollar Mixed as Fed Holds Unscheduled Meeting on Discount Rate Policy

Talking Points
•    Japanese Yen: Mostly Higher Against the Majors
•    Pound: Pares Friday’s Decline
•    Euro: Appears to Have Carved Short-Term Top
•    U.S. Dollar: ISM Non-Manufacturing, Pending Home Sales on Tap

U.S. Dollar Mixed as Fed Holds Unscheduled Meeting on Discount Rate Policy

Nevertheless, the Bank of England is widely expected to hold the benchmark interest rate at 0.50% and maintain its asset purchase target at GBP 200B later this week as policy makers continue to see a risk for a protracted recovery, and dovish comments following the rate decision could lead the pound-dollar to test the March low at 1.4782 as the pair continues to trade within the broad range carried over from the previous month.

A Bloomberg News survey shows all of the 36 economists polled anticipate the BoE to maintain its current policy in April, and the central bank may continue to support the real economy going into the second-half of the year as the MPC aims to balance the risks for growth and inflation. Governor Mervyn King held a dovish outlook throughout the first three-months of 2010 and sees price pressures falling back below the 2% target for inflation later this year, and the pull back in price growth would certainly allow the central bank to maintain a loose policy stance over the coming months as the government aims to encourage a sustainable recovery. However, Credit Suisse overnight index swaps shows investors speculate the MPC to hike borrowing costs by nearly 160bp over the next 12-months after pricing expectations for a 100bp rate hike during the beginning of March, and the rise in the interest rate outlook is likely to push the British Pound higher over the near-term as investors weigh the prospects for future policy.

The Euro extended the decline from the previous week and slipped to a low of 1.3463 during the overnight trade, and the single-currency appears to have carved a short-term top below the 50-Day SMA (1.3643) as the recent rally fails to retrace the decline from the third-week in March. Meanwhile, the European Central Bank is anticipated to hold borrowing costs at the record low of 1.00% later this week as the Governing Council looks to support all of the economies operating under the fixed-exchange rate system, and President Jean-Claude Trichet is likely to hold a dovish outlook for future policy as policy makers expect price pressures to remain subdued this year.

U.S. dollar price action was mixed following the holiday weekend, and the greenback is likely to face increased volatility going into the North American trade as the Federal Reserve holds an unscheduled meeting at 15:30 GMT to review its policy on the discount rate. The FOMC unexpectedly hiked the discount rate by 25bp to 0.75% in February as “these changes are intended as a further normalization of the Federal Reserve’s lending facilities,” and the central bank may see scope to raise borrowing costs going into the second-half of the year as the economic recovery gathers momentum. Service-based activity in the world’s largest economy is expected to expand at a faster pace in March as market participants forecast the ISM non-manufacturing index to advance to 54.0 from 53.0 in the previous month, while pending home sales is projected to weaken 1.0% in February after contracting 7.6% during the first month of 2010.


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Forex Weekly Trading Forecast - 04.05.10

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com