Traders are expecting more QE in the foreseeable future

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Sometimes, nothing happens. Sometimes, there is a pause in the markets as traders regroup, rethink and re-deploy their assets in terms of taking positions. Last night’s overnight trading session and so far this morning’s European trading session seem to be one of those times.

“The calm before the storm”? Well maybe, but that may be a bit over dramatic. It does seem however that traders are beginning to focus on the outcome of tomorrow’s FOMC meeting. And as the USD continues to have problems vs. the EUR, it has become quite apparent that traders are expecting a continuation of quantitative easing for the foreseeable future.

Even though last month’s meeting’s minutes showed that FED governors were divided on whether to continue the QE policy, it is the feeling of most traders that QE will not end during 2013 but rather will continue well beyond that date. If this is the case and the statement from the FED backs this up, then the pressure on the USD will increase.

Once again it goes back to the economies, and which one is proving to be better in term of rebounding. We will continue to watch the releases this week as they will point the way for both the EUR and the USD.

EUR has had a very tight trading range today. The single currency has not come close to strong resistance at 1.3480, only rising as high as 1.3460, while the support level at 1.3425 has been bolstered by corporate bids. There are some rumored stop-loss orders below 1,3395, which if triggered could spur some selling, but that is a long way from the current price action and the bids above the stop-loss levels are expected to be significant enough to keep the currency from a further sell-off. On the top end, 1.3480 needs to be broken with momentum to enable a push towards 1.3500.

In the other currencies, USD/JPY tested 91.00 overnight, before falling back into the mid 90 level. There is nothing new to report on this currency and traders are still expected to push the USD/JPY higher, but this pause could indicate that long USD/JPY positions are holding off increasing at the moment.

The commodity currencies, AUD and CAD both came off their overnight lows, but are having trouble following through with any conviction. AUD had a 45 point overnight trading range, while USD/CAD attempted a break of 1.0100, but never made it, as traders with long USD/CAD positions took profit sending that currency pair back towards the 1.0050 range.

German Confidence number for February was slightly better than expected coming in at 5.8 for February, slightly higher than the 5.7 expected. Now the market will look at US Consumer Confidence number for January due out later this morning at 10 am. It is expected to come in slightly lower at 64, from the previous reading of 65.1. That is the key release in the US today, and that should dictate the direction of the USD.

So until 10 am, expect slight movements in the currencies. The EUR is still overbought, as is the USD/JPY and GBP is oversold. These conditions could make for sudden moves at any time, but I’d expect it quiet until Consumer Confidence is released.

Further reading: GBPUSD Could Retrace To 1.5800-1.5900 Within Larger Downtrend (Elliott Wave Analysis)

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.