US Currency Outlook -- Forex Currency Pairs

The Global-View.com Month Ahead Currency Outlook is prepared weekly by the trading professionals at GVI Forex. For information on the GVI Forex Service Click Here

The USD is back at the precipice again following a difficult week for the currency. The focal EUR/USD relationship seems to be trying to distance itself from the 1.5500 neutrality level again. Triggers for this change of heart were a less hawkish than expected Fed statement, renewed concerns about the financial sector, a rising oil price and expectations for an ECB +25bp rate hike in the week ahead.

There is also a perception that the U.S. and ECB, despite the rhetoric to the contrary have not fully decided that a strong and stable USD could help in establishing some stability in crude oil and commodity prices. This surprises many traders because they feel that ECB policies are leading to a weak USD, and a falling USD is a key contributor to rising oil prices.

As for monetary policy, there is not much doubt that the ECB will be hiking rates by +25bps next week, while that the Fed is now unlikely to execute a policy tightening before the November U.S. elections. Monetary policy is critical to the forex markets. The 2yr bond spread is a key determinant of the EUR/USD level.

Click on chart for two year history

In Japan, no important changes in monetary policy are in store for the near term. There is no pressure for higher interest rates from the BOJ. The economy is presenting a more negative picture at the present time. No major shifts in the spread in the 2-yr bond spread between Japan and the U.S. is likely anytime soon.

Click on chart for two year history

We are now starting to question our premise that forex trading is in a broad transitional phase away from the weak USD period. The EUR/USD is mired in a broad 1.50 to 1.60 trading range. A EUR/USD above the 1.60 line could elicit some sort of central bank activity.

The U.S. and Eurozone economies have been slowing. The U.S. is much further along in the process. Note below in the U.S. Monetary Policy outlook insert that official U.S. rates have reached a floor.