The forex markets were relatively calm today. All eyes were on Wall Street as investors tried to gauge the appetite for risk as the indices bounced around key levels after their significant falls the day before.
Not only is the dollar on the verge of a potential comeback, but there is the possibility that the Bank of England on Thursday might sound a lot less upbeat about the economy than the market currently expects.
In the event the data beats expectations then it makes sense to look for signs of dollar strength against currencies which have underperformed, such as the yen. While the likes of the EUR/USD, Swiss franc/dollar (CHF/USD) and the British pound/dollar (GBP/USD) have rallied above their highs last year, the JPY/USD has yet to do the same.
The euro/Japanese yen (EUR/JPY) currency pair is often considered to be a barometer for risk appetite. However, it is not displaying those characteristics at all at the moment. Today’s 1.4% drop in the German DAX index should have weighed heavily on this pair, but didn’t.
The markets are moving fast ahead of the State of the Union Address tonight. After a sizeable drop at the open, stocks managed to bounce back a little heading into the European close only for U.S. indices to then turn lower again shortly afterward.
The big moves have occurred in the stock markets with index futures tumbling in overnight trading, before bouncing back slightly. The stock market losses have been triggered by the recent sharp falls in government bond prices, which have helped to push yields higher.