The ECB stole the show last week as the currency market traders waited for the interest rate decision and press conference to be delivered last Thursday. Volatility rose, as the ECB delivered a hawkish message, somehow against what the market expected.
The Euro jumped on the hawkish upbeat from the ECB. All EUR pairs gained – with the EURGBP being a champion, as the United Kingdom signaled it is willing to break international law when it comes to negotiating the Brexit deal.
However, when it comes to the world’s reserve currency, the USD, things did not quite change. The EURUSD still eyes the 1.20, finding buyers below the 1.18 area, the AUDUSD trades close to the recent highs around the 0.73, and the USDCHF negative correlation with the EURUSD grows by the day.
The overall sentiment is that the market is coiling, expecting something to unfold. The answer may come from this week’s events.
All Eyes On the Fed’s Communication
Until Wednesday, do not expect much of a movement on the currency market, providing the stock market keeps the current levels. Recently, because of a decreasing interest rate differential between G10 central banks, the currency market moved in a risk-on/risk-off correlation.
On Wednesday, the Fed delivers its monetary policy statement (i.e., FOMC Statement) and the economic projections. The press conference is of particular importance since the financial media representatives have the chance to ask for more details about the average inflation targeting at the Fed.
As the USD is the world’s reserve currency, the volatility is likely to increase during the press conference, as the market participants will closely monitor each word Jerome Powell will say.
Bank of England will deliver its monetary policy decision one day after the Fed. The focus here is how the Bank of England views the recent GBP weakness caused by the dramatic shift in the Brexit negotiations.
New Zealand’s GDP and the Australian unemployment rate are also due this week but do not expect them to be a game-changer for the local currencies. As always, traders will focus on the big picture – it is more important to be on the right side when the Fed’s message comes out.
All other economic data this week comes in as second in terms of importance. Considering that the U.S. elections are due in less than two months, the chances are that this week’s events will eventually end up reinforcing recent ranges.