The US dollar traded lower and may remain under pressure ahead of the Federal Reserve’s monetary policy decision; signalling caution among traders the Fed will replace its expiring Operation Twist stimulus programme with more direct cash injections into the US economy. Worries about Fed policy and potential devaluation of the US dollar allowed the euro to rebound. This helped the single currency to hold off renewed political turmoil in Italy, which saw borrowing rates for Rome spike and put extra pressure on European leaders meeting this week to come good on long-term plans to alleviate Government debt and banking risks. A safer approach to trading helped the pound to near three-week highs against the euro, but sterling’s defensive allure could unravel quickly tomorrow should the Fed deliver more stimulus. However, the pound could make a climb back towards its October highs while UK unemployment data should also offer the pound some direction.
Sterling
Defensive buying lifted sterling to one-month peaks against a basket of currencies, as traders worry that uncertainty in Italy may start to loosen Europe’s grip on government borrowing levels. The pound also strengthened against the safer US dollar on expectations the Federal Reserve will put up a much more direct stimulus plan following its two-day policy meeting.
US dollar
The US dollar traded mostly lower in front of the Federal Reserve’s highly anticipated two-day monetary policy meeting. Investors are growing increasingly cautious about holding ‘long’ US dollar positions with the Fed widely expected to announce another stimulus tactic to replace its Operation Twist programme, which expires at the end of this year. The greenback’s muted response to a spike in Italian bonds, which would typically lead to an increase in demand for the safe haven currency, suggests investors are certain the Fed will take action to help safeguard the US economy from stumbling ‘fiscal cliff’ negotiations.
Euro
The euro recovered from a two-week low against the US dollar and could lead a fresh rally favouring riskier assets should the US Federal Reserve announce another new programme of injecting cash into the US economy. The single currency may also find support ahead of the announcement if German ZEW sentiment index matches forecasts; relaxing fears that a sharp slowdown in the eurozone’s main economy will push the European Central Bank into an interest rate cut early next year.