Q1 2012 Currency Market Summary, Future Predictions

h3 Great Britian Pound Shows Strength

The GBP showed gains against the USD throughout the first quarter of 2012, and was the best performer overall throughout the same period. This trend continues, as the Bank of England looks to continue to normalize monetary policy, as communicated by the Bank of England's Monetary Policy Committee member Adam Posen. Good GDP numbers and other economic data is also bolstering the currency.

h3 United States Dollar/h3

After starting the first quarter in decline, the US Dollar has since started to bounce back, and there are signs that the dollar may perform well in the coming months. Michael Boutros, currency strategist, is bullish on the dollar for a few reasons. Price growth remains above the Federal Reserve's target of 2%, which Michael believes will likely limit their actions, removing any monetary policy risk to the dollar. In addition, the downside pressure on risky assets, including weak data in the US, and China's underperforming GDP numbers is reviving the dollar's reserve appeal. From a technical analysis point of view, the dollar is at a critical level with other currencies, ready to break into a trend.

h3 Euro Zone Debt Crisis/h3

The debt crisis throughout the Euro Zone pushed the European Central Bank to offer $1 trillion in 3 year loans to banks across Europe, pushing down rates. However, the euro has only depreciated slightly, puzzling many investors who expected the impact of the liquidity injection to be larger. According to the Royal Bank of Canada, the reasoning that it seems the impact hasn't been so large is that without the debt crisis, the euro would be worth around $1.62 US dollars, which is 23% higher than its current worth. If the euro zone is able to get past its debt woes, its currency has room to appreciate, however, if the debt problems continue, the euro will likely continue to slide.

h3 Central Bank Policies/h3

The Federal Reserve is expected to continue to ease its dovish tone on monetary policy. The European Central Bank reported that it will keep interbank rates at around 1%, attempting to ease liquidity problems within the euro zone. The Bank Of England and Bank of Canada are both becoming increasingly hawkish, looking to normalize interest rates, while the Bank of Japan indicated that more easing may be necessary, pushing the Japanese Yen down during the first quarter. Bank of Japan's deputy governor Kiyohiko Nishimura was quoted as saying the bank is “committed to implementing additional easing measures, if necessary.” With the weak economic data coming out of Japan, the Yen is poised to continue to depreciate.

h3 Commodity Prices and Currencies/h3

Experts predict rising oil and commodity prices in the coming months, which may adversely affect the currencies of foreign oil dependent countries such as Japan and the United States, and strengthen the currencies of commodity based economies, including Canada and Australia. Oil and other commodity prices should be closely monitored as they have a potential to be a key market driver.

h3 Economic Calender and Market Drivers/h3

Weak US economic data, especially March employment numbers, has spurred some whispers about another round of quantitative easing, dispite the Federal Reserve signaling that it wants to remain neutral. The Fed's Beige Book and the University of Michigan's consumer confidence reading could quell or fuel the whispers of more quantitative easing, either showing that March's employment numbers were just an outlier, or the economy is again weakening. G20, IMF, and WorldBank meetings are all expected in the coming weeks, and they should be followed closely, although history shows that these will likely produce no market moving developments. China's economic performance and the euro zone crisis should also both be followed closely, in addition to the already mentioned commodity prices.

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Written By: Chris Pentago