Tuesday afternoon the Fed announced it was keeping its balance sheet intact while changing the composition of said balance sheet by moving out of mortgages and into long-term Treasuries. This news triggered a strong surge in the Treasury complex, sending the September Treasury Bond to a new high for the year. The move by the Fed is designed to keep the pressure on long-term rates.
A late session surge in Europe is triggering a short-covering rally in the Euro and British Pound ahead of the U.S. opening. The Euro was down sharply overnight as traders reacted to Friday’s bearish U.S. jobs data and the news that Hungary is the latest candidate for sovereign debt issues.
The U.S. Dollar is trading mixed in limited action. Higher metals, crude oil and equities indicate demand is strong for higher yielding assets. This may pressure the Dollar once the New York market opens. Trading conditions are thin because of Friday’s important U.S. Non-Farm Payrolls Report.
Euro Rebounds after Merkel Comments, Trichet’s action
The Euro rebounded overnight after German Chancellor Angela Merkel presented her aid package plan for cash-strapped and debt laden Greece. Short covering turned the Euro around after Merkel said she supports loans from the International Monetary Fund and other European nations as a last resort if all other means of support fail and the country faces default.
FOMC Action Triggers Demand for Higher Risk Assets
On Tuesday, the Federal Reserve left its benchmark interest rate unchanged and reiterated that interest rates would remain low for “an extended period”. In its statement, it also mentioned that inflation remains subdued, and that the weak employment situation seems to have stabilized.
This Week’s Forex Price Action Indicates Dollar is ready to Rally
The strong recovery in the U.S. Dollar late in the week and the inability to break it sharply lower could be a sign that a short-covering rally is imminent. Rumors the Fed may begin to raise interest rates earlier than expected, a poor U.K. economy and fear of intervention all helped boost the Dollar on Friday.