Article by AlgosysFx Forex Trading Solutions
Demand for the US dollar is presumed to weaken alongside the Australian dollar today as the Federal Reserve is believed to launch a third round of unconventional monetary stimulus to breathe life into a tepid US economic recovery. The Federal Open Market Committee concludes a two-day meeting today with a highly-awaited statement, press conference and fresh projections for the US economy.
Prospects for a QE3 elevated after the Fed expressed in its last meeting in July 31 and August 1 that additional stimulus would be warranted unless a substantial and sustainable firming of the economy emerges. In a speech at Jackson Hole Wyoming, Fed Chairman Ben Bernanke seemingly made his case for quantitative easing by defending such policies and calling unemployment a grave concern. Nonetheless, what seemingly tipped the scales in favor of a QE3 was the August payrolls report, which revealed that the US economy created only 96,000 jobs, missing forecasts and much less than needed to keep up with population growth.
As such, analysts widely expect the central bank to deliver a third round of asset purchases, with the size and composition of the plan being the only aspect of contention. Many foresee the Fed leaning toward an open-ended program that is tied to a sustained improvement in the economy rather than specify an amount of purchases to an end-date. Likewise, the central bank is deemed to push back its low interest rate pledge from 2014 to late 2015 in an attempt to boost spending. The Fed is also believed to deliver a more dovish tone to reflect the deteriorating economic conditions in the US. An hour and a half after the decision, the Fed is awaited to release fresh forecasts that could show weaker projections for economic growth and higher unemployment, both of which could provide a rationale for a QE3. Amid these expectations, the Greenback is seen to falter. However, should the Fed fail disappoint, the US currency is apt to rally.
On the economic docket, the Unemployment Claims report is deemed to underscore the sluggishness of the labor sector. The number of individuals filing for jobless benefits likely rose from 365,000 to 370,000 last week, again suggesting low levels of business confidence in the country. Meanwhile, inflationary pressures are seemingly on the rise, with oil prices increasing as of late. Headline producer prices in the US are estimated to have increased by 1.1 percent in August, much faster than the 0.3 percent incline in July. The core figure is deemed to have risen by 0.2 percent during the month, just half the increase seen in the previous month.
Across the Pacific, apart from prospects of stimulus from the Fed, an optimistic assessment of the steel industry from the Reserve Bank of Australia is deemed to buoy the Aussie today. In its September bulletin, the RBA said it expects China’s steel demand to continue growing well beyond an expected peak in residential construction in the country. Strong demand for iron ore from China is also seen to continue, suggesting an optimistic outlook for Australian exports. Considering these, a long position is advised for the AUD/USD trades today.
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