The Federal Reserve unexpectedly put the option of an even bigger stimulus programme on the table after concluding its monetary policy meeting, although there was no major reaction towards the US dollar in front of the uncertain European Central Bank decision. However, the US dollar did fall to an 11-week low against the British pound and to two-month lows versus the euro ahead of the Fed announcement, with investors anticipating a more dovish US central bank following another batch of weak US economic data. The pound was helped higher by better-than-expected UK manufacturing data, and solid PMI figures on Britain’s services sector may reinforce sterling’s position in currency markets. The euro on the other hand is looking vulnerable ahead of the ECB interest rate decision. A fairly explosive outlook could be on the cards for the euro in the coming sessions with the ECB expected to cut rates to record lows.

Sterling

Wednesday’s PMI survey pointed to a more stable manufacturing sector in Britain last month, a result that attracted more flows out of the US dollar and into sterling, pushing the pound up to an 11-week high. The pound could be in another strong position should the European Central Bank cut interest rates and if UK services PMI speaks well about Britain’s second quarter economic growth.

US dollar

The US dollar found little traction and remains vulnerable ahead of US unemployment data after the Federal Reserve unexpectedly announced that an even bigger stimulus programme is still a policy option. After keeping monetary policy unchanged as expected, the Fed highlighted the fiscal drag on the US economy.

Euro

The European Central Bank could destabilise the euro with investors expecting an interest rate cut amid signs of a deepening economic recession in the eurozone. The ECB will wrap up its latest monetary policy meeting and most analysts predict the central bank will be forced to lower borrowing rates to a new record low of 0.5 per cent. However, concerns that lower rates will not filter down from banks through to businesses has led many to believe that ECB President Mario Draghi may also consider using an unconventional policy tool; an outcome that may unsettle currency traders holding sizeable amounts of the single currency. On the other hand, a move by Draghi that could promote economic growth without seriously harming the euro’s allure could significantly bolster demand for the currency.

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