Markets have responded negatively following the Fed’s gloomy outlook for the US economy and announcement to launch limited measures designated to boost growth known as Operation Twist. Operation Twist does not inject any new money into the economy but the Fed will sell USD 400bn of short term bonds and buy USD 400bn longer term debt to lower the yield.
Risk aversion is a clear theme in today’s trading with sharp falls seen in global equities and oil trading back below $85 per barrel. Commodity currencies such as the Australian, Canadian and in particular the New Zealand dollar have weakened markedly on the negative global economic outlook. Whilst despite the negative outlook for the US economy, the US Dollar has appreciated on safe haven flows. Recent activity from the Swiss National Bank making the Swiss Franc less attractive for those seeking a safe haven.
The Pound has continued to slide against the US Dollar, trading at 1.54 on the interbank market.
Risk Aversion returns, USD and JPY higher.
The market this week has seen a fresh bout of risk aversion causing stock prices and gold to tumble. As a result both the USD and JPY have appreciated considerably.
GBPUSD has fallen to its lowest levels since May 2009, falling earlier to a low of 1.5655. Some analysts now expect that the Pound will continue to slide against the USD possibly to 1.54 and from there GBPUSD could re-visit the nasty lows of 12 months ago, where GBPUSD traded between 1.3514 and 1.4986 between Jan-Feb 2009. On the other hand, if we see some more positive news we could see GBP rebound past 1.58. However, at the moment it seems that any potential upside should be limited below interbank 1.6070.
In the Eurozone we have seen renewed concerns regarding a number of member’s budget deficits. As a result EURUSD has fallen markedly, hitting a low earlier today of 1.3649. Moreover, EURUSD weakness is spilling over into other crosses and could force the Euro lower against a number of other currencies, including Sterling.
This afternoon at 13:30 we see the release of US Non-Farm payrolls, a major event on the economic calendar. If these numbers disappoint risk aversion could be strengthened further and you would expect both the USD and JPY to benefit from this.
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