Increased volatility in the currency markets over the past 24 hours on the back of two important fundamental events: the FOMC decision on the Fed interest rate policy and the release of the BoE minutes. Both events are regarded as important precursors for Dollar’s and Pound’s outlook so volatility was more or less guaranteed but what we think is important to note is that both events surprised the market participants.
Starting with the Fed decision on interest rates and Yellen’s comments on forward guidance investors and traders were surprised to hear nothing in terms of committing or even mentioning the possibility of a rate hike in September. But does that mean that Dollar’s outlook is now dead?
On the contrary, Yellen might not have committed in a rate hike on September but seriously she would never do that and to add to that she offered a very bullish outlook for the currency over the medium term. So even though traders might have reacted by dumping some short-term Dollar positions the broader direction for the currency will be upwards.
Taking advantage of the current Dollar weakness the Euro climbed to 1.1350 after testing the 1.1200 support area early in the morning. The rise of the Single currency has been primarily fueled by the decline of the Dollar as we had no fresh news for the European coin and the risk posed by the lack of progress in Greece’s issue remains. We believe that the current rally higher might be hard to be sustained and as soon as traders realize that Dollar’s outlook has in fact strengthened we could see the Euro below the 1.1300 area pretty soon.
On a different mood and outlook, the Cable had a similar reaction to the Fed decision but the fundamentals for the currency are different. The Cable rallied on the back of Dollar’s weakness but was also lifted earlier in the day when the BoE minutes revealed a bullish tone among policymakers.
The report revealed that the MPC members are happy with the current rate of progress in the economy and that adds to the currency’s outlook. Today’s Retail Sales report poses a risk as it’s expected to print lower but we could be in for a surprise that will drive the Cable even higher.
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