FX Fundamentals Are A Shifting

• faithmight
• May 18th, 2011

The first half of the year saw a strong GBP and weak USD; a super strong AUD and a surprisingly strong EUR. Now the tides are turning. As the first half the year comes to a close next month, what will the forex market look like going into the second half of the year:

The Federal Reserve is subtly, and cautiously, turning hawkish as it is no longer looking to extend its current quantititative easing program. The $FED seems perfectly content with allowing the program to end in June as it originally intended. In fact, more surprising, is that the $FED is more comfortable raising interest rates before lightening its hefty balance sheet. (KathyLien.com, Zero Hedge, FX Street)

The Bank of England (BoE) is dovish and that is not going to change anytime soon. In fact, they have been explict in stating that if they do move on monetary policy, it will be to fiddle with the quantitative easing amount, not with interest rates. And that is not what the market had in mind as the GBP rallied the first half of this year because the market was anticipating interest rate hikes out of the BoE. Gotcha. (Bank of England)

The PIIGS are imploding and yet the European Central Bank (ECB) is hawkish. In fact, the ECB remains intent on tightening interest rates despite the sovereign debt issues that plague the PIIGS of the Eurozone. And a change of guard at the International Monetary Fund may have dire consequences on these beleaguered European economies. (The Project Syndicate, STFX, Confessions of a Macro Contrarian)

The Australian economy continues to show signs of resiliency despite the natural disasters that ravaged the country and that region of the world in the first half of the year. In fact, the economy is so robust now that the Reserve Bank of Australia is signaling more interest rate hikes may be delivered sooner than even it had expected. (The Australian, International Business Times)

In all, it looks like a stronger USD, a still-strong AUD, a weaker GBP and a weaker EUR for the second half the year. Needless to say, we shall see how it all plays out.

(Image credit: The Economist)

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Tickers: $EUR, $USD, AUD, fundamentals, GBP

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