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U.S. Dollar Loses Ground Ahead of FOMC Interest Rate Decision

Meanwhile, EC President Jean-Claude Juncker said he is “convinced” that a Greek bail will not be “necessary” after European policy makers laid a broad framework on how to help the ailing economies operating under the fixed-exchange rate system, and went onto say that “there are still a number of technical questions” which he pledged to address “in the next few weeks.”

Meanwhile, investor confidence in Germany weakened for the sixth consecutive month in March, with the ZEW survey slipping to 44.5 from 45.1 in the previous month, while the gauge for the current situation increased to -15.9 from -54.8 to top forecasts for a rise to -52.0. Moreover, the ZEW survey for the Euro-Zone weakened to 37.9 from 40.2, which exceeded expectations for a drop to 38.5, and investors may continue to lower their outlook for the economy as policy makers anticipate to see an uneven recovery this year. At the same time, consumer prices in the euro-region increase 0.3% in February, with the headline reading for inflation slipping to 0.9% from a revised 1.0% in the previous month, while the core CPI weakened to an annualized pace of 0.8% to mark the lowest reading since recordkeeping began in 1997. As price pressures remain subdued, market participants speculate the European Central Bank to hold the benchmark interest rate at the record-low of 1.00% next month as the Governing Council maintains its one and only mandate to ensure price stability.

The British Pound bounced back on Tuesday to reach a high of 1.5125 against the greenback, and we are likely to see the GBP/USD maintain the narrow range carried over from the previous month as the Bank of England is widely expected to maintain a dovish outlook for future policy. Meanwhile, a report by the U.K. Department for Communities and Local Government showed home prices increased at an annual rate of 6.2% in January, which well exceeded forecasts for a 3.5%, and conditions are likely to improve turn higher over the coming months as the expansion in monetary and fiscal policy continues to feed through the real economy.

The greenback lost ground against most of its major counterparts, while the USD/JPY advanced for the second-day to reach a high of 90.69, and comments from the Fed later today is likely to spark increased volatility in the exchange rate as investors weigh the outlook for future policy. The FOMC is widely expected to hold the benchmark interest rate at 0.25% in an effort to encourage a sustainable recovery, and the central bank may maintain its pledge to keep borrowing costs at the record-low of an extended period of time as a result of the ongoing weakness in the private sector. Meanwhile, the economic calendar is excepted to show a 3.6% drop in housing starts following the 2.8% in January, while building permits are forecasted to slip 3.4% to an annualized pace of 601K in February from 621K in the previous month. At the same time, import prices are anticipated to weaken 0.2% after rising 1.4% in the previous month, and subdued price growth would certainly give the central bank scope to maintain its current policy throughout the first-half of the year as the MPC aims to balance the risks for growth and inflation.

Forex Weekly Trading Forecast – 03.15.10

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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