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Forex Flash: Fed locked in to current strategy despite US economy – UBS

FXstreet.com (Barcelona) - Q3 policy-driven price action in gold brings us to an interesting point. Since Q4, the Fed's balance sheet has been expanding again but gold has not responded in the usual 'debasement' manner. According to Research Analyst Gareth Berry at UBS, “Initially, this was attributed to better US data and stable inflation expectations (or easing disinflationary pressures). Such factors are indeed negative for gold and a stronger dollar is a part of this (self-fulfilling) process.”

The first week of April witnessed a massive dose of (potential) liquidity provision from the Bank of Japan, while weakening data out of the US is also pointing to shifts in policy expectations again for the Fed. In addition, if emerging markets are indeed weakening, then stimulus either through rates or outright quantitative policy (such as FX-intervention) can be expected. All of these factors should have proven to be positive for the yellow metal.

Again, points to other factors at play such as positioning. “However, if we look at the broader policy picture, then perhaps the move in the gold price is telling markets something far more pernicious: Central Bank activism has failed. Simply put, even if the US' economy is weakening further, it is hard to see what the Fed can do beyond their current actions.” Berry adds.

Forex: EUR/USD keeps gains made on NY opening, at 1.3130

The EUR/USD peaked at 1.3148 high on the New York opening and is consolidating its gains just above 1.3120. The market may be headed for another push to the upside after ECB President Draghi’s words. He spoke before the European Parliament and said he expects gradual recovery in the Eurozone in the second half of 2013, but it’s an outlook subject to downside risks. Draghi defended that the rebound in Ireland, Spain and Portugal are proof of structural progress. The ESM should be made operational by mid 2014.
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Forex: EUR/GBP on top around 0.8580

The cross continued climbing higher as the NY session started and the EUR/GBP printed a current daily high at 0.8582. The EUR is more prone to risk after ECB Draghi’s remarks, expecting Eurozone gradual recovery in the second half of 2013 and an operational ESM by mid 2014.
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