Daily Market Review - 05/22/2014

EUR/USD

The Euro is near strong support at 1.3654. Yesterday it was broken on the downside, but the asset has bounced back up immediately, and the Euro continues to be above the line. Overall bias is bearish. If support holds long enough we might see a rebound.

USD/JPY

The pair is starting to go down again after recent ascent. The forecast for the asset is bearish. In general it approaches a crucial level at 100, which might be tested soon.

GBP/USD

The Pound is recovering well from the trough at 1.673. Upward trend is likely to continue. The main challenge remains at 1.700, which was almost attained in the beginning of the month.

Market Overview

If everything is more or less clear with FRS exit from the 3rd round of the QE (as the regulator aims to end the program in autumn already), then perspectives of raising of the interest rate remain quite vague. More over in conditions when significant volumes of liquidity are pumped into the system, monetary authorities have to devise new mechanisms of rates management.

In other words currently the important thing is not when the FRS is going to start raising rates, but the way it will be down. Release of protocols of FOMC meeting can partially enlighten on that matter. In the basis of current system there is mechanism of crediting banks at the expense of reserves located on FRS deposits.

These credits are tied to the key interest rate of the regulator, to which everybody’s attention is usually drawn. This rate is called a federal funds rate. The rate is called the main one because rates on almost all types of credit depend on it.

Earlier when the FRS had only started the first round of the QE, it was assumed that before raising extra liquidity would be taken outside the boundary. But its volumes turned out to be so significant that it wouldn’t be that easy to do that. It is not ruled out that the regulator might increase the role of the deposit rate but it won’t help to influence money flow coming through the market of short term capital omitting the FRS.

Economic Calendar

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