Forex Major Currencies Outlook (March 20, 2013)

Their most recent rate decision included a mention of potential tapering off of monetary policy stimulus in order to keep inflationary pressures in check yet Federal Reserve head Ben Bernanke was quick to dismiss expectations of an early withdrawal of bond purchases. Today’s FOMC rate decision could set the record straight on what policymakers think should be done about the U.S. economy and if we hear of more concrete plans to tighten monetary policy sooner than later, the U.S. dollar could resume its rally. Otherwise, remarks on persistent weaknesses in the economy could trigger a selloff.

EUR: Bearish

Lawmakers over at Cyprus rejected the recently announced bailout proposal for the country as this involves an unusual one-time tax on deposits in Cypriot banks. This prompted fears of a bank run as some depositors rushed to withdraw their bank holdings to avoid getting slapped with high tax rates. However, the Cypriot parliament voted against this bailout and seems to be considering asking for extra funding from Russia instead. Unless Cyprus is able to get guarantees of enough liquidity to shore up its troubled banks, it could edge closer to a default which would be very negative for the euro.

GBP: Bearish

Pound pairs are trading very carefully these days as yesterday’s inflation releases failed to spark any volatility in GBP/USD. The pair is still stuck around the 1.5100 to 1.5175 area, awaiting for more clues from the U.K. economy. The BOE is scheduled to release the minutes of their latest monetary policy meeting today and this report should shed light on why the central bank still decided to make no changes to its asset purchase program. The minutes would reveal exactly how many policymakers voted for further easing and a higher number this time would reveal that the central bank is becoming increasingly dovish.

JPY: Neutral

Japanese banks are on holiday today, which suggests quiet trading for yen pairs. Markets could be more focused on central bank rhetoric from the U.S. which is awaiting the FOMC statement and the U.K. which will soon release the BOE’s monetary policy meeting minutes. This suggests that USD/JPY and GBP/JPY might be more volatile today compared to other yen pairs.

CHF: Neutral

The Swiss ZEW economic expectations report, which improved from -6.9 to 10.0, in the previous month is set for release today. Another improvement could boost the franc against the U.S. dollar and the euro while a negative reading could trigger a sharp selloff. Franc rallies have been subdued lately as the SNB remains committed to keep the franc’s value down so selling the franc might yield a larger profit potential.

Commodity Currencies (AUD, NZD, CAD): Bearish

The Australian dollar, New Zealand dollar, and Canadian dollar have all been sliding lower against the lower-yielding U.S. dollar for the past few days as risk aversion is hurting the higher-yielding and riskier assets. The ongoing bailout concerns in Cyprus is mostly to blame for the lack of risk appetite even in equity markets as commodity currencies are very sensitive to market sentiment. New Zealand is set to print its Q4 2012 GDP figure today and a 0.9% expansion is eyed versus the previous 0.2% uptick in growth. A stronger than expected figure could boost the New Zealand dollar while a weak one could result in a selloff.

By Kate Curtis from Trader's Way