Last week the Fed surprised markets by hiking the discount lending rate to banks by 25 Basis points to 0.75%.The Fed went out of its way to emphasize this is solely a move towards normality and does not reflect on the highly watched benchmark rate which affects lending costs directly. Nevertheless Forex players perceived this move as a preliminary step towards eventual hike of the key benchmark rate and moved into Dollar buying across the board. The Euro Dollar dipped the 1.34 level the Sterling Dollar traded at the 1.535$ zone and the Yen hovered around 92.Althogh Dollar buying eased a bit with most currencies bouncing back, Forex sentiment remains rather sensitive to the probability of Fed tightening.
The Fed chairman Ben Bernanke is expected to give his semi-annual testimony on Wednesday evening (GMT Time) and investors will be keen to figure where exactly the Fed is aiming with this change in discount rate.
Buy signal- If indeed the Fed will confirm it is aiming for an eventual tightening in rate policy or mention this is part of a grand scheme towards exiting emergency measures this will be considered a bullish Dollar signal. Moreover with the US annual GDP due (due in Friday) in sight investors will assume positive numbers.
Sell Signal-With the Dollar currently stabilizing and failing to close at new highs any statement from the Fed that this is an isolated decision (raising the discount rate last week) and add cautious comments on the economy it will be perceived as a bearish signal and could trigger a Dollar selling.
Sterling sentiment recovering in recent hours
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