FED to Support EUR?

It’s that time again, the Fed to the rescue or not? Helicopter Ben and his buddies will either make a few happy or disappoint and make many happy. The net dollar longs have had a tough battle so far this week. Weaker US economic data coupled with deteriorating financial market conditions has boosted expectations for some Fed support announcement at the end of today’s two day policy meeting. Current market momentum demands an answer. Investors expectations have been running on full steam and require help as they are about to hit that brick wall. Financial markets are likely counting on an extension of Operation Twist at a minimum, and the recent pullback in the USD would suggests there is at least some expectation for further measures being priced in. For the risk lovers, extending “Twist” would have to be considered a disappointingly limited move, leaving risk assets and risk-sensitive currencies vulnerable to renewed downside pressures.

New easing measures, such as renewed outright asset buying or a cut in the IOR or discount rates, will obviously pressure short risk positions. For how long? That depends on the European leaders handling of their periphery financial problems. The rumors of bond buying and banking union announcements at month end has bunds under pressure this morning. Some investors will take any easing measures to add to their net long dollar positions as Euro events “will continue to generate systemic stress absent more decisive action from policy makers.” Any disappointment to risk appetite should support the usual list of risk aversion currencies.

Following Euro yields has become a prerequisite to understanding single currency movements for FX traders. This morning, Spanish and Italian sovereign bonds have opened up on firmer footing with investors, in what seems to be, a more positive mood. The market is taking some comfort in the news that Euro leaders at the G20 are willing to do more to try to reduce periphery borrowing costs. It will be tried and tested tomorrow by the Spanish. After a successful bill auction yesterday, the Spanish treasury are back with +EUR2b of short dated issues. Probably not soon enough, but specific G20 pledges are expected to be announced by the Euro summit at the end of the month. Talk of game changing initiatives are been bantered around this market. The most mouthed are Merkel relenting her staunch position with plans to have the ESM shortly to buy sovereign bonds. This is unlikely to bring much relief short term as market continues to straddle precariously high yield levels.

The monotony of Fed waiting has been broken by the announcement that Governor King at the BoE voted with the minority for the first time in three years for the 5-4 vote for unchanged QE at the June meeting. This minority voted for an expansion of QE by +GBP50b. Policy makers also looked into the merits of cutting the bank rate and decided that an ease would have no advantage over further QE. The market can probably now expect a +GBP50b expansion at next months meeting.

June 20

The retail sector continues to be running with similar short EUR outright positions entered late last week. They had the nerve to hold these positions through the brief EUR post Greek rally and in the current environment has the opportunity to leverage those gains despite the plethora of support on the downside. The underlying bias is mixed and patiently waiting for the Fed announcement. Technically, the single currency outright is supported by the 10 DMA (1.2585) on the downside. The market will be expected to continue to pick up some of the common currency until this support threshold is broken. Despite the daily charts working on an overbought bias, the market requires harder evidence for direction.

Forex heatmap

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Plethora of EUR Support?

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell