U.S. dollar and Fed QE2 – the morning after

GBPUSD: Dollar Trends, Inflation Report Vie for Influence

The British Pound has re-coupled with risk appetite after last week’s Bank of England rate decision proved to be a non-event, opening the door for the dollar’s response to the Fed’s QE reboot to take over. While this bodes ill given the corrective nature of current price action, the publication of the central bank’s Quarterly Inflation Report adds a layer of uncertainty. Indeed, the document represents the first opportunity for BOE officials to weigh in on the implications of the government’s austerity program with in-depth knowledge of where deficit reduction will come from. To that effect, traders will be eager to see if this pushes the rat-setting MPC any further into dovish territory, perhaps even to consider following the Fed down the path of additional asset purchases.

CHART 3

Source: Bloomberg

USDJPY: G20 Summit May Interrupt Otherwise Quiet Trade

The short-term yield spread remains the paramount driver of Yen price action. It is small wonder then that prices have tracked sideways since mid-October as both the Federal Reserve and the Bank of Japan pushed ahead of additional monetary easing. The economic calendar is lackluster for the remainder of the week but things may get choppy heading into the G20 summit on Thursday and Friday considering the topic of “currency war” threatens to resurface. Naturally, this subject is particularly touchy for USD/JPY considering the US is now being internationally accused of intentionally depressing the greenback’s value with QE while Japanese officials explicitly intervened in FX markets just several months ago.

CHART 4

Source: Bloomberg

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