Weekly Review: Forex Traders Await Interest Rate Meetings

Earnings season continues this week. However, with many of the big names already reporting, Forex traders are shifting their focus to this week’s interest rate meetings. In the US, the FED will be conducting their FOMC meeting on Wednesday. As usual, traders aren’t expecting any changes to the Fed Funds rates but will be watching for changes in the wording of the accompanying statement.

If the FED hints to a possible future rate hike, it could lead to Dollar strength occurring.

In addition to the FOMC Meeting, this Friday’s GDP announcement is expected to draw lots of attention. The GDP comes on the heels of better than expected US Retail Sales numbers for March and an improving jobs outlook. Therefore, expectations have risen for a better than expected number to occur – the Dollar could be vulnerable to weakness if the GDP results aren’t dazzling.

A new 2010 low on the EURUSD were hit last week as yields on 10 year Greek debt have skyrocketed to nose bleed levels of nearly 9.0% (this compared to 3.0% for Germany). To put this in perspective, the bond market is valuing Greece debt similarly to that of debt laden B rated companies like Kodak, Hilton Hotels and Lucent Technologies. This spike in the yields was enough to force Greece to finally capitulate and make a formal request to the EU and IMF last Friday for aid.

Looking ahead, the current worry is that these high rates will spill over to the rest of the P.I.G.S. Therefore, the fate of the Euro now appears to ride in the hands of bond markets. Currently, Forex traders are watching Portuguese yields, which have risen this month but remain below their February highs. If these rates break out to new year highs then contagion worries are expected to intensify. This could easily drag the Euro below 1.3000.

Economic results continue to be mixed in the UK as last week’s Claimant Change numbers were much better than expected but GDP and Retail Sales figures were worse than expected. Therefore, with the UK parliament election looming, it appears that focus is moving from the UK’s economic recovery to the government outlook. On that front, the second televised debate occurred last week. Initial polls showed that Liberal Democrat leader Nick Clegg continued to hold onto much of his earlier momentum.

As such, prospects for a hung parliament have risen but Forex traders may be more receptive to a Conservative/Liberal Democratic coalition than a Conservative/Labor combination. Looking ahead, with few high impact UK economic events scheduled this week, the GBPUSD may stay within its 1.5250 to 1.5450 trading range until a clearer picture emerges of what the future UK Parliament will look like.

Credit worries have begun to intensify regarding Japan’s rising debt to GDP levels. As such, the Yen was unable to capitalize on its “Safe Haven” status and rally on the Greece/Euro negative news. After dropping below 92.00, the USDJPY has jumped back above 93.00 as sellers in the Yen emerged.

Looking ahead, the Bank of Japan meets for their monthly interest rate meeting and press conference. Forex traders will be watching to see if the BoJ makes any mention of Japan’s debt or intervention. If the BoJ fails to address the budget, it could lead to additional Yen weakness as traders may begin to question whether Japanese officials have the ability to curb Japan’s growing deficit.