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Fundamental Report – March 20, 2013: US Dollar Gains Ahead of FOMC Policy Meeting

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The US Dollar is trading broadly higher against most of its major counterparts ahead of this week’s interest rate decision from the US Federal Reserve, and following the disruptive banking news out of Cyprus (which prompted Dollar buying as a safe haven currency). The latest news out of Cyprus shows a parliamentary vote rejecting the removal of funds from personal deposit accounts, and the end result is that markets are now concerned over the prospect that Cyprus might not receive the bailout funding that will be necessary for the country to meet its bond obligations in coming months.

To be sure, forex markets markets are currently dealing with a variety of event risks (in many different areas of the world), and this essentially points to the likelihood of increased volatility through the end of the week. In the UK, the next major market mover for the British Pound will be seen with the UK Budget numbers, and the policy meeting from the Bank of England. Here, markets will be watching for suggestions that the BoE will be looking to inject additional stimulus into the economy (using the country’s own version of quantitative easing). If we see the “go ahead” from the BoE, it will be a positive for regional stock markets (FTSE 100) and a negative for the country’s currency (GBP).

FOMC Meeting to Determine Weekly Close in Forex

If we do not see any more near term developments in Cyprus, the main story of the week will rest on the decisions (and statements) made by the US Federal Reserve at its Wednesday meeting. Markets are expecting no change to interest rates (which remain at historical lows), but the attention will center on the policy statement that is released at the conclusion of the meeting.
If we see an upbeat tone from the FOMC (perhaps citing low inflation numbers and the recent strength in the labor market), stock markets will likely fall while the US Dollar meets steady buying pressure. A statement like this would be an implicit suggestion that stimulus programs are no longer necessary. With the elevated uncertainty that we are seeing in other areas of the world (particularly in the Eurozone), markets will turn away from risk assets and buy into safety (bullish for Gold and the US Dollar).

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