Forex Forecast

Dollar Consolidates in Europe After a relatively subdued start in Asia, risk appetite suffered in Europe, with the dollar reversing some of its losses, particularly against the high-beta currencies. The JPY continued its grind higher, while GBP hit 32-month highs on a trade-weighted basis..

Dollar Still Struggling Overnight the US dollar failed to recover from Friday’s selloff, and further ground was surrendered to sterling and to the yen. Although Friday’s weak US Q1 GDP report is not entirely to blame for the recent dollar weakness, it certainly didn’t help the dollar’s cause.

Dollar On The Ropes The US dollar sold off across the board on Friday after Italy managed to auction bonds successfully despite Spain’s downgrade by S&P earlier. A weak US GDP report for Q1 inflicted further damage, leading to another round of dollar selling.

JPY Bears Retreat After a shaky opening to the Eurozone fixed income markets, risk assets recovered some lost ground in Europe, with the euro rallying some 80 pips back up to 1.3240. The BTP 10-year auction results were reasonably strong though less demand was seen for the 5-year bond.

BoJ Eases Boldly The Bank of Japan surprised by the market by easing far more than consensus expectations. It delivered incremental easing on several fronts. First, the portion of the asset purchase program reserved for actual asset purchases was increased by JPY 10 trn, and virtually all of this will be dedicated to JGB purchases.

S&P Downgrades Spain Late during the US session, S&P downgraded Spain by two notches from A to BBB+, outlook negative. The agency warned that the country’s ‘budget trajectory will likely deteriorate’ and more national support may be needed for the banking sector.

USDJPY Under Pressure The mixed messages from yesterday’s FOMC meeting were greeted with suitably cautious trading in the European session. The dollar reversed some of its overnight losses, though some USDJPY bulls appear to be taking back their long positions ahead of tomorrow BoJ meeting, with the pair trading heavy.

RBNZ On Hold At 2.5% The RBNZ kept the policy rate unchanged at 2.5%, but implicitly raised the prospect of a future interest rate cut if the New Zealand dollar remains elevated. The short overnight policy statement warned that continued currency strength may force the bank “to reassess the outlook for monetary policy”.

Mixed Signals From The Fed The Fed offered few surprise in the April press release, though Chairman Bernanke’s press conference was more dovish.. It is clear Bernanke wants to keep all the tools available to the Fed on the table, and was explicit in noting ’balance sheet tools’ which are available.

UK Back In Recession The pound came under pressure versus both the euro and dollar after the Q1 GDP print confirmed that the UK is back in recession. The headline number came in at -0.2% versus consensus estimates of +0.1%.

FOMC Decision Approaches Surprisingly-strong US earnings reports released after the NY close generated an upbeat tone in Asia, allowing the Australian dollar to claw back all losses it has suffered since Tuesday’s soft CPI reading.