• Dollar at risk of correction
  • Eurogroup to decide on Greek loan
  • Bank of England’s inflation report
  • Low oil, weaker Canadian dollar

The central banks are not supposed to shape the global financial markets.  Instead, investment opportunities, productivity gains and rates of return should be directing the flow of global capital to ensure that most promising ventures and investments are funded to support growth.  That is the standard finance theory that is taught in schools today.

In practice, when there is no meaningful growth in most developed economies and consequently, the rates of return on savings or bonds are close to zero – or even negative in some cases – then the central banks’ interest rate decisions do become a big deal.  Why? Because so much money is looking for higher returns even if they are a fraction of percentage point.

This explains why the currency market was quiet yesterday and thedollar traded sideways against the major currencies. Most traders are anxiously waiting on today’s Fed Chair Janet Yellen’s testimony before the Senate Banking Committee to discern if and when the US interest rates will be raised.

In January, Fed Chair Yellen remarked that the economy was close to being fully recovered since the 2008 “great” recession and therefore, the rates could be raised as early as June.  Since then, the economic reports have failed to live up to the market expectations.  If the Fed Chair hints today a delay in the rate increase then the dollar could weaken and stocks could rally even higher as they remain as only realistic option for investors who are in search of higher returns, albeit greater associated risks.

So, it is all up to Fed Chair Yellen today. Her testimony could potentially shape the dollar’s path in the coming weeks and months.

EUR-USD is defiantly trading above 1.1300 early this morning as traders wait on the Eurogroup’s decision on a 4-month loan extension to Greece that was announced last Friday. Yesterday evening, the newly elected Greek government submitted its proposal of austerity measures for the loan period.  If the Eurogroup rejects the proposal and holds back on the loan then the currency pair could drop precipitously as Greece runs out of money.  Stay tuned.

GBP-USD has traded unchanged near 1.5450 overnight.  The market will be paying close attention to what Bank of England Governor Mark Carney may say during today’s inflation report hearing.  A falling inflation rate has become a concern for the bank in the recent months as it is contemplating to raise the interest rate after the May election.  However, low inflation could delay this move and undermine the pound this year.

USD-CAD rose to 1.2600 yesterday but settled near 1.2560 overnight.  Another drop in oil prices was the catalyst for this move yesterday.  The West Texas Intermediate crude price fell by $4 per barrel to $48.65.  Bank of Canada Governor Stephen Poloz will give a speech today.  And as mentioned in the previous updates, he will likely hint another rate cut in March.  This will push the currency pair to 1.2700 or higher.

AUD-USD remained unchanged near 0.7800 overnight. The ongoing story of low commodity prices continue to pull the currency pair toward a 6-year low.  There are no major economic reports or events scheduled.

Have a great day!