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Forex Major Currencies Outlook (March 4, 2013)

USD: Bullish

Although the sequestration in the U.S. which started last week will likely have long-term negative effects on the economy, this event rendered price action dependent on risk sentiment once again. This means that the U.S. dollar could still be able to outpace most major currency counterparts because of its low yield and safe-haven status. Ben Bernanke already mentioned that the Fed will carry on with its asset purchase program, which means that the central bank shares a dovish stance just like everyone else. However, central bank decisions from other major economies this week could reveal which ones are much more dovish and the U.S. dollar still stands to benefit if further easing efforts are implemented elsewhere.

EUR: Bearish

Sentiment for the euro remains bearish this week as the ECB will make its monetary policy statement later on. There are no interest rate changes expected as there seems to be very little room for further cuts, but the central bank could decide to offer more LTROs for banks who are struggling with lending and liquidity. In last week's speech, ECB head Mario Draghi expressed his openness for further easing as part of the central bank's commitment to shift euro zone's focus away from financial problems and back to economic growth. So far, there has been no clear resolution in Italy's politics but Bersani did shun the possibility of forming a coalition government.

GBP: Bearish

The Bank of England is set to make its monetary policy decision also within the week and traders are starting to price in further asset purchases from the central bank. Minutes of the previous monetary policy decision showed that BOE head Mervyn King moved over to the bears' side, which suggests that looser monetary policy is in the cards possibly within the next three months. No monetary policy changes from the British central bank this week would increase the odds of further easing in their next statement so the overall bias for pound pairs is still bearish.

JPY: Neutral

Kuroda has already been appointed by Prime Minister Abe as the next Bank of Japan Governor but incumbent leader Shirakawa will still head the BOJ rate decision for this week. No major changes are expected, as Shirakawa would probably make the transition as smooth as possible. Besides, Japan's CPI figures came in line with expectations so far, although they still reflected the prevailing effects of deflation on the economy.

CHF: Neutral

Only the foreign currency reserves and a speech by Swiss National Bank head Thomas Jordan is scheduled for this week, and these aren't due until the latter half. For now, the Swiss franc might stay at its current levels against the euro and the dollar, awaiting market catalysts. EUR/CHF and USD/CHF could react more to euro zone and U.S. data in the meantime.

Commodity Currencies (AUD, CAD, and NZD): Bearish

AUD/USD just broke below the key support zone at 1.0150-1.0200 as traders are anticipating a 0.25-0.50% rate cut from the RBA tomorrow. However, RBA Governor Glenn Stevens dismissed this possibility in an earlier speech as he talked about how the previous easing efforts are starting to kick in and that the current level of stimulus is appropriate for now. No rate cut could trigger a bounce back above 1.0200 for AUD/USD while an actual rate cut could push it closer to parity. The BOC is also scheduled to make its monetary policy statement this week and, even though no policy changes are expected, outgoing BOC Governor Carney could be less hawkish and not discuss rate hikes this time around. No reports are due from New Zealand, which means that the Kiwi could follow the Aussie's behavior for the most part.

By Kate Curtis from Trader's Way