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By Gaurav Kashyap, Alpari ME DMCC
Looking at the performance of the Dollar over the past few weeks and months of trading, and one will notice that much of the resulting weakness in the Greenback has been a result of traders riding bullish interest rate outlook expectations and this has seen large appreciation in the Euro, Pound and Australian Dollar against the US Dollar.
As traders seek higher yield rates while taking advantage of lowering borrowing rates in the US, Wednesday's FOMC rate decision did nothing to alter these views and sealed the near term fate of the Dollar. During Wednesday's meeting, Bernanke confirmed that rates would be held between zero and a quarter of a percentage point, which was largely expected. The Fed President also confirmed that the $600bn QE2 program would end in June of this year, but more alarming were his comments regarding future interest rates: "we continue to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the Federal Funds Rate for an extended period."
His bearish overtones and inclusion of "exceptionally low levels for an extended period" weren't well received by the markets and as a result solidified the fate of the Greenback in the trading sessions to come. With higher inflation and subsequent higher interest rates in and around Europe, that leaves the US Dollar well below the interest rate yield curve and it looks like that's going to be the status quo for some time. Not that the Fed or the Treasury will mind - a weaker Dollar is driving US exports and having its positive effect on US output - but it will elevate the Greenback to be the funding currency of choice and will continue to remain under pressure as traders continue to take advantage of the lower US interest rates.
Looking to US non-Farm payroll data
Looking at the trading week ahead, by far the most influential piece of data for the Dollar will be Friday's Non-farm payroll report.
Expectations are for an addition of 185K jobs on the overall reading following the 216K jobs added during March with the unemployment rate holding steady at 8.8%. A significant upside on the release will surely see risk appetite to continue building with US equity markets perhaps the largest beneficiary of such a scenario. On the flipside, a significantly weaker reading will favour Dollar bulls. Along with the Non-farm payroll number, the ISM non-manufacturing release on Wednesday will be an event driver of risk.
Australia, Bank of England, European Central Bank rates expected
With so much of trading determined by traders looking to capitalize on interest rate differentials, all eyes will be on the interest rate decisions from the Reserve Bank of Australia, the Bank of England and the European Central Bank. All three of the central banks will be expected to hold rates their rates at 4.75%, 0.50% and 1.25% respectively - and it will be their comments following their announcements which will be driving their respective currencies.
A visit to Greece by a group of EU and IMF officials as early as this Thursday could see some of the recent risk appetite pulled back as the delegation will seek to thrash out the conditions of a possible debt restructuring plan. But with the Euro eyeing 1.50 levels before the ECB's rate decision, and the Pound targeting 1.70, perhaps a worse-off reading in Friday's Non-farm payroll could stall a run to these levels and bring the US Dollar back.
Staff
