Currency markets are gearing up to the main event this week – the Federal Reserve’s interest rate decision which is due on Wednesday following a two-day meeting beginning on Tuesday by the FOMC.
Investors’ main focus will be on whether the Fed will drop the word “patient” from its statement. Such a move would be interpreted as the Fed beginning to hike rates by June this year.
As a result of Fed rate hike expectations and the diverging monetary policies between the Fed and the European Central Bank, the US dollar has been strengthening recently, especially against the euro. The single currency hit a fresh 12-year low of 1.0461 on Friday. It bounced slightly in the Asian session his morning to 1.0547 but the overall downside bias remains as the ECB’s quantitative easing program launched last week weighs on the currency while European bond yields continue to decline to record lows. The ECB’s 1.1 trillion euro bond-buying stimulus program aims to stimulate growth and fend off deflation in the region.
Meanwhile, uncertainty over Greece’s funding position has worsened investor sentiment on the euro. The country is due to make two large payments to the IMF this week, further depleting its cash resources.
The Bank of Japan will announce its latest policy decision on Tuesday, a day before the Fed, and is widely expected to maintain its aggressive asset-purchase program as the BoJ aims to reach it inflation target of 2%. The dollar/yen pair was steady in Asian trading today, holding above Friday’s low of 121.12 and reaching as high as 121.41.
Another central bank in focus this week is the Reserve Bank of Australia as it release its policy meeting minutes on Tuesday. The aussie traded from 0.7612 to 0.7657 in the Asian session.
The Canadian dollar hovers near 6-year lows as oil prices continue to fall amid oversupply fears. Cheaper oil is also impacting the country’s labour market as it is a big oil exporter and the unemployment rate ticked up last Friday to 6.8% from 6.6%. USDCAD hit a high of 1.2822 on Friday.
The day ahead is quiet in terms of key economic data. ECB President Mario Draghi is expected to speak at Frankfurt finance summit.