Central banks stole the spotlight last week as a coordinated effort from six central banks to boost liquidity for the financial sector sent the USD falling and just about every other asset higher. (More on the actions here) The participants included central banks of the U.S., EU, England, Japan, Canada, and Switzerland. The move occurred several hours after China initiated a similar liquidity adding policy by lowering its Reserve Requirement Ration for banks by 0.50%. Looking ahead, Forex traders will continue to be watching the central banks as five key banks hold interest rate meetings this week. Australia and Canada will be meeting on Tuesday, followed by New Zealand, the U.K., and EU and Thursday.
After the abovementioned central bank news, the question for Forex traders this week is whether interest will return towards the dollar. The question is especially important as it comes on the heels of last Friday’s Non Farm Payrolls release. The report showed growth of 120,000 jobs which was more or less as expected. The big surprise was in the unemployment rate which dropped to 8.6% from 9.0%. Overall, the dollar gained following the news. However, it remains to be seen whether that move was the result of profit taking or Forex traders taking a positive view of the dollar.
For a possible answer to the dollar’s strength, Forex traders should keep their eyes on the price of Gold. The metal has often traded counter to the dollar as it is viewed as a trade on higher inflation. Prices were especially strong last week as the move by central banks to add dollar liquidity was viewed as inflationary. Since the news, prices have traded in tight range spending most of their time between 1740 and 1755. A drop below their trading range support could indicate that traders are moving away from the inflation worries which would benefit the dollar.
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The euro opened stronger last week following talk of EU integration. However, by mid-week, the EURUSD was at risk to lose all of its initial gains as EU leaders failed to detail any timetable for integration. Also, it was stated that the Trillion euro target for the EU bailout fund would fall well short of its target. The EURUSD though, was saved by the coordinated central bank effort which caused a 250 pip move from week low to highs. Nonetheless, by week’s end, the EURUSD was back below 1.3400 after selling off on Friday (see chart).
Looking ahead, it is becoming clearer that the EU isn’t capable of solving its credit crisis on its own without resorting to allowing a PIIGS country to default or mass printing of euro’s from the ECB. As such, the spotlight will be on this week’s Interest Rate Meeting. With voices growing stronger for the ECB to take greater actions to solve the crisis, ECB President Mario Draghi will on the hot seat during his press conference. Any lack of clarity from the ECB regarding its actions is expected to be viewed as euro negative and could trigger losses in the EURUSD.
Civil strikes hit the U.K. last week as workers protested to the austerity measure cuts that have been enacted. So far, economic effects of the strikes have been muted, however they do put the upcoming MPC Meeting in focus. Forex traders will be watching to see if the Bank of England will provide further monetary stimulus to the U.K. to ease the burden of budget cuts. With year over year inflation already topping 5.0%, the Pound could be under greater pressure should the BoE use more stimulus. As for Forex traders, if last Friday’s overall weakness in the pound is an indicator, then it seems that traders are already banking on further moves from the BoE. As such, we could see the pound underperform until Thursday’s MPC Meeting.