FX Analysis and Technical Outlook

April 26, 2016

For both this past week and the coming week, some of the world’s most prominent central banks are taking center stage, issuing eagerly anticipated rate decisions and policy statements.

This past week, the European Central Bank (ECB) was in focus. Not much about the ECB’s public pronouncements on Thursday was unexpected. Interest rates remained unchanged this time, as anticipated, after the surprisingly aggressive easing actions presented at last month’s meeting. ECB President Mario Draghi struck an overall dovish tone, reiterating the need to address persistent conditions of low inflation and economic growth risk. At the same time, however, Draghi urged patience in the face of prolonged weakness in inflation, hinting that any further easing will need to wait. The press conference skewed towards the dovish side primarily because Draghi kept open the potential for lower rates, in contrast to last month’s conference, when he remarked that he did not expect interest rates to decline any further. As a result of the dovish, but somewhat mixed, messages from the ECB, the euro rode a volatile wave of market sentiment on Thursday. The currency initially surged due to the conspicuous absence of any rate changes or further easing measures, but then dropped abruptly during and after the press conference when it became clear that Draghi had become more dovish than he had been last month. Overall, the central bank gave little in the way of concrete guidance for the euro aside from some dovish-leaning nuances, but the currency continued to fall into the end of the week.

Shifting to Asia, the end of this week saw the Japanese yen plunge against other major currencies as reports surfaced that the Bank of Japan (BoJ) is considering potentially more aggressive easing actions in the form of additional stimulus measures. This would entail the implementation of negative lending rates to financial institutions in Japan. Though the yen immediately began to plummet as the market digested this information, it should be noted that a similar tumble for the Japanese currency occurred when the BoJ pushed interest rates into negative territory in late January. Immediately thereafter, however, the yen embarked on a period of major strengthening for the ensuing months. Therefore, the effectiveness of the BoJ’s easing tools and tactics has come into question. Could the yen once again shrug off the central bank’s attempts at restraining its rise? Next week brings the Bank of Japan’s highly anticipated monetary policy meeting and statement. Indeed, this past week’s reports of the BoJ’s plans for more easing has set the tone for higher expectations of action next week. The question still remains, however, as to what sustainable effect that might have on the yen.

This brings us to the most watched of major central banks, the US Federal Reserve. Next week brings the potentially pivotal policy decision and statement from the Fed, in the form of the FOMC Statement. The Fed is not expected to make any changes to interest rates at its meeting next week, as the US central bank has generally become increasingly dovish since its rate hike in December, but will provide its current outlook on the common concerns of low inflation and economic growth risks. At the current time, Fed Fund futures are pricing-in only around a 1% probability of a rate hike next week, although the probability of any rate hike by the end of the year increases dramatically to nearly 70%. Largely due to the Fed’s increasing dovishness since December, the US dollar has been weakening steadily for the past few months, despite the prevalence of increasing dovishness across most other major central banks as well. As always, next week’s statement will be scrutinized in minute detail for wording nuances that might indicate a dovish or hawkish bias. If the Fed continues its increasingly dovish progression, the dollar could extend its weakness of the past few months. Any signs of emerging hawkishness, however, could help to buck the downtrend.

To add onto the Fed on Wednesday and the BoJ on Thursday, next week will also feature the rate decision and statement from the Reserve Bank of New Zealand. Aside from the central banks, some other important economic events and data releases next week are as follows:

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