Is an end in sight to risk-on, risk-off forex rallies?

US Fed changing the game

The U.S. Federal Reserve has indicated a shift in its monetary policy putting markets on notice that it is contemplating bringing quantitative easing to an end, maybe even by late this year, as there have been signs of improvements in the U.S. economy. Interest rates in developing countries are so uniformly low that instead patterns of quantitative easing are a major consideration for forex. 

Another important change is that the EUR no longer looks like a terminal case. The European Central Bank has committed to step up to the plate to hold the single currency together. Eurozone policy makers are attempting to build the necessary fiscal architecture needed to support the EUR. That's still very much work in progress.

However, it must be noted that the EUR will only ultimately be saved if the Eurozone can rediscover that increasingly illusive condition known as sustainable economic growth. On that front at least the outlook remains grim.     

In the meantime, should the Fed's employment target of 6.5% look likely to be hit, and that could happen sometime in H2, then it will reassess its QE programme. In anticipation of that seminal moment, the U.S. dollar likely would rally, probably strongly across the board. The U.K., for instance, with its permanently weak economy and ballooning current account deficit could see GBP sold off aggressively.

GBPUSD daily chart

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