23rd of June 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
23 June 2011 – 8:00 GMT
Thursday

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Market Analysis Desk
Foreign Exchange Research: www.fibosignals.com/5585/resources.html
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FUNDAMENTAL ANALYSIS at 0800 GMT

USD
The dollar found some consolidation in the wake of yesterday's FOMC decision. The statement itself confirmed that QE3 will finish on schedule at the end of June, and Fed Chairman Bernanke cited inflation as a reason why further stimulus would not be forthcoming. The key policy language pledging to keep the policy rate "exceptionally low&for an extended period" was unchanged. However, it is notable that no pledge was given to keep the balance sheet at its current elevated level for an extended period. Given that allowing the balance sheet to contract passively is likely to be the first normalisation step, this suggests at least some members of the FOMC want to maintain an ability to tighten should the need arise, and potentially at short notice. On the other hand, Bernanke warned any 'determined' central bank would do anything to fight deflation, so if conditions turn for the worse nothing can be ruled out, but the chances of QE3 are extremely small at this stage.

We expect this FOMC meeting to mark a turning point in the dollar's fortunes and look for EURUSD to end the year at 1.30. Indeed, supporting this view, the dollar gradually strengthened as Bernanke's press conference wore on, and we look for further gradual gains over the months to come. Overnight, EURUSD traded 1.4286-1.4358, USDJPY 80.26-80.64.

EUR
Newswires reported that talks have begun between Eurozone officials and banks in Greece, France, Germany, and the Netherlands on the subject of private sector involvement in the next phase of the Greek rescue.

Germany's Chancellor Merkel offered her views on a variety of topics, although most of the points have been made before. She said that she wants a voluntary, substantial, contribution from the private sector in the Greek aid deal but said that this is not possible unless the ECB are in agreement.

Bernanke emphasised time and time again during yesterday's press conference that a disorderly unravelling of the situation in the Eurozone would be very dangerous for the global economy. It was an indirect way of warning Europe to aim for a speedy resolution, consistent with recent comments from other G7 officials.

Ahead today German PMI and those for the Eurozone are due.

GBP
BBA loans for house purchases (cons. 30k) and CBI reported sales are due today. Activity indicators in the UK are crucial now to determine whether UK policy will make a turn to the dovish side.

The June minutes showed that the MPC voted 7-2 to keep rates on hold. As expected, Martin Weale and Spencer Dale voted for a hike, while new member Ben Broadbent voted to keep rates on hold. The dovish Adam Posen was once again the only voter for further QE although it was mentioned that 'some' members are in favour in principal, supporting Paul Fisher's comments yesterday. The overall tone was dovish which weighed on sterling as downside risks to growth were highlighted by the majority of the members. We remain bearish on sterling.


A. White
Analyst at Fibosignals.com


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