Dollar's weakness creates a volatile trading environment for the majors

Volatility remained elevated over the past day even though the price action in the major currencies and markets has been a little bit unexpected. The bias remained bearish for the major currencies like the Euro and the Dollar with the exception of the British Pound that continued its correction rally to the upside.

The key events of the day were the central bank meeting of the Bank of England and the release of the minutes from the previous Fed meeting that decided to leave unchanged the current monetary policy. Even though both meetings were more bearish than bullish given the tone of the policymakers that took part, not both currencies had the same reaction.

The Dollar remained weak especially after the miss on the NFP report last week and Fed officials’ comments added fuel to the fire. The general tone that came out of the minutes revealed that a change to a higher interest rate policy would require serious improvement in the domestic market hence it’s something that might take some time.

As a result the Dollar took a plunge against the Euro that benefited from this development and even though it was pretty volatile throughout the day managed to trade higher. We believe that a higher Euro is not justified at this point so we attribute the gains of the Single currency to the weakness of the Dollar. With the rate trading around the 1.1300 highs we feel that it’s going to be tough for the Euro to remain at these levels for long.

The Cable on the other hand was more straight-forward in its trading action, after a pullback to test the 1.5300 support area the UK currency continued its correction to the upside hitting a 1.5370 high during the course of the day. This morning the currency is trading exactly at these highs and we could see a final push towards the 1.5400 barrier but that might limit any further gains. The Pound has lost some of its fundamental backing recently but while the Dollar remains weak we could see more strength.