Greenback Weakens As US Markets Open

During the US trading session today, markets will again try to predict the outcome of the 2 day FOMC meeting beginning today. The odds on favorite at this time, is an extension of Operation Twist and a new program to assist the economy through the beginning of the year. Investors are clearly a bit reluctant to buy the US dollar ahead of tomorrow’s Fed decision as the Fed. This would extend the Fed’s balance sheet and is in theory a negative for the dollar. However, most of this should now already be discounted by markets. Gold continues to ease up as the dollar turns down.

Traders can assume that this issue will soon lose its impact on currency trading once the FOMC meeting is out of the way. As usual global sentiment on risk and the performance of the European equity markets still have to play their role in guiding EUR/USD trading. Markets are still a bit uneasy with Italy’s political and financial future in the air, bringing the eurozone crisis back into center stage. Increase lending costs in Italy can easily flow over the border into Spain which might push the ECB into action or force Spain to request an official bailout. These are only possible scenarios but they are all weighing on the euro.

Traders continue to watch the US politicians turn up the rhetoric, getting their last words in and their agendas heard before they are forced to finalize a deal to avoid the fiscal disasters facing the US. Markets have been reassured by President Obama that a deal is to be had, the market worries are the types and effects of tax increases next year, forcing investors to consider selling profitable and losing positions before year end to protect from future tax changes. Traders do not want to be backed into a wall with little time to close positions. At this time, many economists think that once the FOMC is finished that we will see a huge market selloff ahead of a final deal by US lawmakers.

At present the EUR/USD is trading at 1.2988 in positive territory as the US dollar weakens ahead of the FOMC statement due on Wednesday. At least for now, the underlying sentiment on risk isn’t that bad and it is no good enough reason to anticipate on big euro losses in the very near future. There is ongoing market talk of euro buying interest from Asian central banks recycling USD proceeds from local currency interventions.

In the US, the small business confidence and the trade balance will be released. These reports are usually only of intraday significance for EUR/USD trading, at best. So, markets have to look for guidance from the usual suspects as there are the US fiscal cliff, Italy and the EMU debt crisis.