Focus remains on the all-important FOMC meeting tomorrow

Today's key points

  • Profit taking overwhelmed the US stock market in late trade but there does not appear to have been a major change in risk sentiment. No major impact on bond yields and EUR/USD remains above 1.30. However, both SEK and NOK are weaker.
  • ECB board member Jürgen Stark only sees limited room for additional rate cuts and does not believe "non-conventional" easing is imminent.
  • Focus remains on the all-important FOMC meeting tomorrow and the economic releases today will probably have a hard time attracting the market's attention. In Europe focus will be on the ZEW indi-cator and speeches by ECB board members Trichet and Weber. In the US PPI and housing starts are due to be released today.

Markets Overnight

In the US the stock market yesterday was unable to hold on to earlier solid gains as profit taking apparently overwhelmed the market in late trade. Financial stocks were hit particularly after rallying strongly in early trade. The S&P500 and Nasdaq closed down 0.4% and 1.9% respectively. However, at the moment, it does not appear that the negative close on the US stock markets represents a major change in risk sentiment com-pared with last week. After a nervous opening, Asian stock markets have strengthened overnight and most are higher this morning. This morning the Nikkei is up 3.2% and the Hang Seng is up 0.6%.

Overall bond yields in the US yesterday were higher and the yield curve steepened on the initial rally on the US stock market. The turnaround in the US stock market in late trade only had a modest impact on US bond yields. Since market close in Europe yesterday, 2Y and 10 Y bond yields are both down by 1bp to 1.0% and 2.95%, respectively.

Yesterday evening EUR initially weakened against USD on the weaker US stock market but has since recov-ered in Asian trade. Overnight EUR received support from comments by ECB board member Jürgen Stark to today's edition of Handelsblatt, where Stark indicates he sees only limited room for additional rate cuts and the ECB not in a situation of "imminent" use of new tools. EUR/USD is trading largely unchanged at 1.302. JPY is slightly weaker with USD/JPY and EUR/JPY this morning trading at 98.46 and 128.0, respectively. In Scandi-navia, both SEK and NOK have weakened on the late turnaround in the US stock market. This morning EUR/SEK and EUR/NOK are trading at 11.04 and 8.88, respectively.

Despite the weaker US stock market, crude oil prices rallied in late trade and reversed most of the decline earlier in the day following the OPEC's announcement this weekend that it will not cut production further at this stage. Nymex crude oil for April delivery this morning is trading at USD47.12.

Global Daily

Focus remains on the all-important FOMC meeting tomorrow and the economic releases today will probably have a hard time attracting the market's attention. We expect US interest rate markets to trade sideways ahead of the FOMC meet-ing. Both headline and core PPI are expected to post small increases for the month of February. Housing starts and build-ing permits are still trending down and the February data will probably not change that picture.

ZEW is the most interesting economic release in Euroland today. We expect a small setback following big gains in the previous four months. Also, the ECB's Draghi, Weber and Trichet are due to speak today. US yields and risk appetite are once again likely to set the tone on Euroland interest rate markets today.

The positive tone on equity markets seems to be driving FX at the moment, with the cyclical currencies being the main beneficiaries. Also, EUR/USD has managed to break back above the 1.30 level. Looking at the option market, sentiment is increasingly EUR-bullish, with EUR call/USD put options commanding a premium relative to EUR puts/USD calls for ma-turities up to six months. However, turning to our short-term financial models, the model estimate is currently at 1.25 and although the deviation is not yet significant, it does suggest that EUR/USD is trading too high relative to the level implied by movements in other asset classes. We remain bearish on the single currency, looking for EUR/USD to trade towards 1.24 on a three-month horizon.

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