Currencies, Commodities Mixed as Fed Begins 2-day Meeting

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Key financial markets are trading mixed ahead of a busy week of central bank activity. The EUR/USD is trading slightly better; however, the GBP/USD, Gold and Crude Oil are trading lower in light trading.

Today marks the first day of a two-day U.S. Federal Reserve policy meeting. Its statement will be released tomorrow afternoon so trading may slow into the release of the announcement. Expectations are for the Fed to leave its benchmark interest unchanged; however, all eyes will be focused on the policy statement to see if there are any clues regarding the amount and the timing of additional stimulus.

Since its last meeting in June, the U.S. economy has sputtered, giving investors a reason to speculate about additional stimulus. Even if the Fed hints strongly about implementing another round of quantitative easing, traders may not know about the timing of such event. Some investors feel that a weak Non-Farm Payrolls report on August 3 will be the tipping point, but others believe late August or early September will fit better in the Fed’s plans.

On Thursday, the European Central Bank and the Bank of England will release their policy statements. Speculators are pressuring the British Pound a little this week as bets have increased that the central bank will make moves to stimulate the economy. Although interest rates are expected to remain unchanged, speculators believe the BoE will implement additional bond purchases to try to right the U.K. economy.

The wildcard is the ECB meeting. Last week, ECB President Mario Draghi vowed to do everything in his power to preserve the Euro. This triggered an impressive short-covering rally in the EUR/USD, changing the trend to up on the daily chart, but failing to put a dent into the longer-term downtrend.

This week, the Euro is trading lower due to increasing criticism of Draghi’s comments and position squaring ahead of the next central bank meeting. Traders are looking for the central bank to leave interest rates unchanged after lowering them in early July. At issue will be the possible announcement of additional bond purchases in Spain and Italy.

If the central bank decides to make additional purchases of Spanish and Italian Bonds, and interest rates begin to fall in these two countries, then demand for higher risk assets could increase, giving the Euro and British Pound boosts while weakening the U.S. Dollar. Additionally, dollar-based commodities such as gold and crude oil could see appreciation.

December Gold is trading sideways to lower as traders await the central bank announcements. Last week’s breakout to the upside in gold has been met with very little follow-through. This could mean that additional aid from the ECB and the Fed may be priced into the market. If these two central banks disappoint the market then gold will fall back into a sideways-to-lower trade.

September Crude Oil is being underpinned by speculators looking for trouble in the Middle East. Additionally, traders are supporting the market in anticipation of fresh stimulus from the central banks. The primary concern for traders at this this time is the abundance of supply. If the ECB and the Fed fail to deliver stimulus then this combined with the abundance of oil could mean lower prices over the near-term. 

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About: FX Empire Analyst - James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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