The US Dollar Index continues to trade at elevated levels with market attention show shifting to the next monetary policy meeting from the Federal Reserve. Looking at trading activity mid-week, we can see that markets are caught in trading ranges but there is some scope for change here very soon as the next Federal Reserve meeting could show that policymakers are aligning their bias in favor of injecting additional rounds of stimulus (a third round of quantitative easing). Market expectations, however, are calling for no change in the Fed’s stimulus policy so the more likely scenario is that we will see some suggestion from Ben Bernanke that the central bank’s views have become increasingly dovish as the labor market in the US continues to struggle.
If this is the case, expect equity markets to have a negative couple of trading sessions and a flock to safety into the US Dollar in forex markets. The coming sessions, however, will have some significant trading data that can easily guide markets with the ISM manufacturing numbers to guide stock markets (and forex markets) and this will be followed by crude oil inventories which will be helpful for determining how commodities markets will close the week. Since crude oil is also priced in US Dollars, expect any weakness in oil prices to add to the upside pressure on the US Dollar.
In the Euro region, the main influence will likely be driven by the coming interest rate decision from the European Central Bank (ECB). Comments made by central bank members are beginning to suggest a level of division between the potential strategies options that should be taken, so the accompanying policy statement could lead to some additional volatility in the Euro. Since the central bank is widely expected to leave interest rates steady at 0.75 percent, the statement is where most of the market attention will be placed, so expect choppy trading conditions into the release.
When talking about the political divisions that are being seen in Europe, most of the opposition is coming from Germany, where officials have started to show some disagreement with the European Stability Mechanism (ESM) strategies that are currently in place. Looking longer term, traders should be watchful of any suggestions that the ECB is biased toward decreasing interest rates before the end of the year, as there might be little choice with the region still unable to resolve its debt crisis.
The GBP/USD is still pressuring the topside on the shorter term time frames but we are seeing some major resistance at 1.5770 that is limiting prices thus far. Given the higher lows that are being seen in the 15 minute charts, an upside break is likely but bulls should be cautious if we see another failure in this area. Buying dips into 1.55 is the preferred strategy.
The S&P 500 is still trading in its daily uptrend channel and this latest bull move is being confirmed by some major trend line breaks after a significant Fibonacci retracement seen on the 4H time frame. These moves have turned the bias upward and the preferred strategy at this stage is to buy any signs of weakness into the 1360, which is a short term Fibonacci level as well as resistance turned support on the daily charts.