Market Sentiment is that the Federal Reserve will keep interest rates steady at 0.25% on Tuesday’s 03/15/2011 FOMC Statement at 2:15pm EST. Chairman Ben Bernanke has made it clear in past statements that the U.S. economy is in a fragile state and a rise in interest rates would deter that growth. The Federal Reserve is committed to keeping the economy growing and therefore a rise in interest rates is not projected. Currency markets have already anticipated this forecast and its effect was evident through the British Pound, Swiss Franc and Euro rising against the US Dollar.
Effect on the US Dollar – A rise in interest rates would indicate the economy is growing and expanding and therefore strengthening the currency. A decline in interest rates indicates the economy is slowing down and contracting, therefore weakening the currency. Since the Federal Reserve has taken a dovish approach to monetary policy we expect the interest rate to remain constant and the US Dollar to experience some weakening throughout the week.
Word of Caution – Though Retail Sales numbers rose on Friday it is a result of rising oil prices rather than actual sales increasing. The increase in oil prices affects gas prices at the pump thus increasing retail sales.
Due to uncertainty in the markets, periods of retracement might fool the average trader into taking a position contrary to the trend. Therefore we always suggest implementing “Tight Stop” strategies in all your trades.
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