Monday saw the markets focus on the decision by Larry Summers to withdraw from the race to become Federal Reserve Chairman. The markets now believe Janet Yellen will assume the role and, because of her past performance within the Open Market Committee, we can assume she is likely to keep interest rates lower for longer and QE in place for longer too. Hence the US Dollar weakened but, as this is still just speculation, the weakness halted before the end of the day even after poor industrial production data but ahead of the Federal Reserve's interest rate setting meeting which started today. No change is expected in the US base rate but there is a chance the Fed's bond buying commitments may change and that could strengthen the US Dollar is it is a firm announcement. Also influential will be the US inflation data due at 12.30 GMT.
That US Dollar weakness has an effect elsewhere though. Sterling had another twitchy day at the top end of its trading ranges but there is no momentum in the markets to take the Pound higher. Sterling did make a fresh 8 month high against the US Dollar but retreated in late trade. Perhaps the landslide of UK data due this morning will make the difference. We are expecting inflation to have eased a little but producer prices are more of a leading indicator of inflation so those will be influential.
The Australian and New Zealand Dollars were weakened by the US Dollar activity but not by much. The Australian Dollar weakened a little overnight after the Reserve Bank of Australia stated that a weaker Aussie Dollar would benefit the economy. It may be an obvious statement but it has resonance with investors and traders who all know the Aussie and Kiwi Dollars are still overbought. We get the NZ current account data overnight tonight and Australian leading indicators so there is plenty of potential for volatility in both of the Australasian Dollars.
Article supplied by David Johnson, Director at Halo Financial - Currency Specialists
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