As expected, the currency markets were fairly volatile on Monday. The EUR/USD pair received new bids and climbed back above the 1.1550 level in European trade. Ever since the euro started rising high against the dollar, despite the hot war still raging in the Middle East. No surprise then that traders are highly focused on the dovish (accommodative) monetary policy declarations expected from the U.S. Federal Reserve and the Bank of England later this week.
The EURO/USD pair showed remarkable strength, gradually grinding higher, clearing the 1.1550 barrier as the U.S. dollar was hit by a wave of selling pressure. A primary reason analysts point to for this change in dollar value is the market correction. These changes arrive as investors prepare for major policy shifts from the Fed and BoE. As multi-asset traders respread their perceptions, the euro won vs its American equivalent, leading with a clear order of specialists amidst global market panic.
At the same time, the GBP/USD pair rose as it moved closer to the 1.3600 milestone. The British pound received powerful reinforcement from a weakening U.S. dollar. Consequently, the pound has experienced a wider drop in its value. GBP/USD remained bullish at the start of Monday’s European session. This rapid rebound highlights just how connected these currency pair dynamics can be.
So while traders are capitalizing on good market conditions, they are on edge because of the rapidly worsening Israel-Iran conflict. The Israeli-Palestinian conflict is again provoking fears of global unrest. Though for the moment at least, markets seem to be looking past these strains. The overall mood suggests traders are more tuned into signals about where monetary policy may be headed next and not so much into uncertainty from geopolitical turmoil.
The highly-anticipated Fed policy decision on Wednesday is the centerpiece for traders. Expectations regarding interest rate changes and economic outlook will significantly impact currency valuations. Just as with the above, when the BoE makes its policy announcement later in the week, expect it to have a major impact on GBP movements too. Uncertainty is bound to keep traders on their toes while they wait for these central banks to show their hands.