FX Traders Prepare for QE II

US Dollar weakening is taking place in the hours leading up to the Federal Reserve Open Market Committee meeting where the Fed is expected to begin another round of quantitative easing. This key event is overshadowing most other events that have taken place or those that will occur over the remainder of the week.

Yesterday the Aussie dollar shined following the surprise decision by the Reserve Bank of Australia to raise interest rates 25 bps to 4.75%. This sent the AUD/USD soaring, climbing above the parity level versus the greenback. Traders seem to love big round numbers and it doesn’t get any more round than 1.0000.

The election in the US appears to have weakened the greenback as the Republicans took control of the House of Representatives while reducing the Democrat’s majority in the Senate.

Today the pound is higher versus the dollar following release of better than expected Services PMI data. The survey came in at 53.2 on expectations of 52.4. Traders have bid the cable to its highest level since the end of January.

Later today the payrolls firm ADP will release their version of the Non-Farm Payrolls. This is typically considered a preview of the Labor Department’s report to come on Friday. Also due to be released today is the ISM Manufacturing PMI.

And finally we’ve arrived at the highlight of the week, if not the year; the Fed’s announcement on quantitative easing. A majority of economists polled by Bloomberg expect the Fed to announce a $500 billion asset buying program. How and when the Fed will implement the program remains to be seen, as does the direction of the dollar following the announcement this afternoon. Much of the QE II has been priced into the EUR/USD already.

There is a risk that the initial announcement may disappoint traders and the dollar may strengthen following. But the continued loosening of US monetary policy cannot be ignored and the dollar should weaken versus the EUR/USD.

Daily support for the EUR/USD rests at 1.4000, the upper boundary of the triangle pattern on the daily chart. Resistance is found in the range of 1.4080 – 1.4100.