The coordinated efforts by the Group of Seven appears to have provided a short-term relief in the currency market, but global policy makers still face a heavy load of challenges as the uncertainties surrounding the world economy continues to bear down on investor confidence. As Japan struggles to contain the nuclear crisis, with the political turmoil in the Middle East heightening, the rise in risk appetite could be short-lived, and the flight to safety may gather pace over the following week as market sentiment remains battered.
The Euro rallied to a fresh yearly high of 1.4138 on Friday despite the slew of dismal data coming out during the overnight trade, and the near-term rally in the EUR/USD may taper off ahead of the EU Summit later this month as the risk for contagion intensifies. European Central Bank board member Gertrude Tumpel-Gugerell argued that the region needs a “quantum leap” to strengthen its economic governance as European policy makers maintain a relaxed approach in addressing the sovereign debt crisis, and went onto say that the Governing Council will weigh the risk for inflation at the beginning of the following month while delivering a speech in Belgrade, Serbia. As the ECB maintains its one and only mandate to ensure price stability, market participants expect the central bank to combat rising price pressures by lifting the benchmark interest rate off the record-low next month, but the Governing Council may soften its outlook for inflation as the devastating earthquake in Asia/Pacific dampens the prospects for global trade. As the EUR/USD continues to retrace the decline from back in November, the pair may make a run at 1.4200 going into the following week, but we may see a short-term correction in the exchange rate as the relative strength index approaches overbought territory.
The British Pound fell back from a high of 1.6190 to maintain the range from earlier this week, and the exchange rate may continue to trend steady ahead of the Bank of England policy meeting minutes due out on March 23 as investors weigh the prospects for future policy. BoE board member Charles Bean showed an increased willingness to maintain the expansion in monetary policy as higher interest rates risks slowing the economic recovery, and endorsed the central bank’s wait-and-see approach as the economic outlook remains clouded with high uncertainty. With the BoE minutes on tap for the following week, comments from the central bank are likely to set the tone for future price action, and we may see a growing shift within the MPC as rising commodity prices continue to raise the risk for inflation. In turn, the GBP/USD should maintain its currency range going into the following week, but the policy statement could spur a breakout in the exchange rate as investors weigh the likelihood for rate hike within the first-half of 2011.
The U.S. dollar lost ground against most of its major counterparts following the rebound in market sentiment, and the rise in risk appetite may gather pace during the North American trade as global policy makers take extraordinary steps to stabilize the world financial system. As the economic docket remains bare for Friday, risk trends should dictate price action going into the end of the week, and the greenback may come under increased selling pressures as equity futures foreshadow a higher open for the U.S. market. However, the ongoing developments in the world economy could impede on investor confidence as the financial market remains in disarray, and the major currencies could face choppy price action throughout the remainder of the day as market liquidity thins ahead of the weekend.