Dollar Tentatively Higher Ahead of Federal Reserve Meeting

This month investors have increasingly moved to riskier assets like stocks, commodities and higher-yielding currencies, as concerns about a ballooning U.S. fiscal deficit and low Interest Rates have fueled Dollar selling. The Federal Open Market Committee (FOMC) is expected to hold Rates steady but markets will be interested for any guidance on whether the Fed will continue its expansionary monetary policy for a prolonged period of time.

USD – Dollar Advances on Economic Optimism

The Dollar saw quite a volatile session during last week’s trading. The Dollar dropped against the EUR, although saw a rising trend against the Yen and especially against the Pound, as the Dollar soared over 400 pips against the GBP. On Monday the U.S dollar gained in thin conditions, extending a bounce seen late last week as traders covered short positions ahead of a Federal Reserve monetary policy meet and a Group of 20 summit.

It seems that the main reason for the Dollar’s volatility is the mixes results coming from the U.S economy last week. The U.S Retails Sales continued to deliver positive figures. This means that the total value of sales at the retails level is growing, showing that consumers in the U.S might feel safer to spend these days. Also last week, the Consumer Price Index (CPI) rose by 0.4%, proving that inflation continues to rise in the U.S. This could have a significant impact on the Dollar, as the rising inflation usually leads to an interest rate hike, which may very well support the Dollar.

But on the other hand, the Long-Term Purchases publication failed to reach expectations for a 65.3B result which would have reflected a recovering economy, and the final result was 15.3B. This appears to be one of the main factors for the Dollar depreciation against the Euro.

As for the week ahead, a number of important data are expected from the U.S economy. The most significant will be the Federal Funds Rate Statement which is scheduled for Wednesday 18:15 (GMT). Analysts expected no change to the central bank’s target, but speculate whether the fed will make changes to its debt-buying programs. Traders are advised to pay close attention to the Fed’s announcement on Wednesday.

EUR – The EUR off 1 Year Highs; GBP Dips

The EUR eased against the U.S. dollar to $1.4688, having lost about 0.2% on Friday, though strong support is seen around $1.4640. On the Yen, the European currency held steady around 134.35 yen. The EUR dropped from near a 1 year high versus the U.S dollar after the European Union (EU), said yesterday that a restructuring of the banking sector must take place. According to EU policy makers Europe needs continued low Interest Rates and government stimulus measures to keep the recovery on track.

The Sterling extended losses, hitting a 4 month low against the EUR of 90 pence on news the UK had set tougher-than-expected conditions to the potential exit of Lloyd’s Bank from a state-run scheme to protect its assets. The GBP dropped to 90.53 pence per EUR from 90.40 pence on Sept. 18, after earlier touching 90.67 pence, the lowest level since Apr. 24. The British pound may weaken further against the Dollar and the EUR on speculation the Bank of England will keep borrowing costs low.

Looking ahead to this week, a batch of data is expected from the Euro-Zone’s leading economies, especially on Wednesday. Many French and German indicators are scheduled for Wednesday, as this day seems to be the day that will determine the Euro’s direction for this week. Traders are advised to follow all the main publications on this day and look for any unexpected result that may soar or tumble the Euro.

JPY – Yen Losses Strength against the Majors

The Yen continues to depreciate against the major currencies during last week’s session. The Yen dropped over 100 pips against the Dollar and the USD/JPY pair is currently traded around the 91.50 level. The Yen also saw a bearish trend against the EUR.

While the Japanese yen gained against all but one of the 16 most- actively traded currencies since early August as the Democratic Party of Japan became the likely winner in national elections, forecasters say it will decline 5.7% against the U.S dollar and 1.2% versus the EUR by year-end. The economy is too weak to support a stronger rate, according to analysts.

The main data of this week appears to be the Trade Balance report, which is expected on Wednesday 23:50 GMT. This report measures the difference in value between imported and exported goods during August, and is one of the best indications for Japan’s exports. A better-than-expected result might have the potential to support the Yen.

OIL – Crude Oil Slips On Firmer Dollar

Crude prices fell for a 3rd day on speculation further evidence of a global recovery is needed to extend the commodity’s 61% gain this year. Oil prices were also pressured by bearish comments from Sinopec, Asia’s top refiner and China’s 2nd largest oil and gas producer, that diesel demand in China continues to lag economic recovery.

Oil rose 3.9% last week, thanks to U.S. government data showing a larger-than-expected draw in crude stocks, heavy losses in the U.S. dollar and rallying stock markets. Though Crude prices have only gained about 3% so far this quarter, after shooting up 40% in the June quarter, some analysts said Oil prices were set to move higher in coming weeks amid an economic recovery and seasonal winter demand.

Looking ahead to this week, traders are advised to follow the leading publications from the U.S and the Euro-Zone, and to follow the equity markets in the major economies in order to predict crude oil’s movements. Traders should also focus on the Crude Oil Inventories report which is expected in Wednesday, as it has proven to have an instant impact on oil’s value.

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