With risk aversion easing and risk acceptance re-entering the forex trading market, the U.S. dollar and Japanese yen are shedding their roles as safe havens for parking investor capital and resuming their more usual roles as currencies representative of their national economies, the former consumer oriented and the latter driven by exports. In such capacities, both are currently over-priced, as neither the U.S. consumer nor Japanese exports are particularly robust at this time, and forex traders can expect to see these crosses shifting their ranges in the months to come, barring any intensification of the financial and credit crises and resumption of risk aversion trading.

The first test of these new ranges occurs Thursday, with the Bank of England and European Central Bank monetary policy decisions, and the release of the U.S. banking stress tests. Each of these risk events carries sufficient weight to move financial markets in some way.

The BoE monetary policy decision is slated for release at 11:00 AM GMT (9:00 PM Canberra time), and no change is expected in either the current interest rate of 0.50% or the quantitative easing (QE) programme underway. In that scenario, the announcement is likely to be a non-event; however, any intensification of QE would be GBP negative, particularly against JPY and the Swiss franc.

The ECB decision is scheduled for release at 11:45 AM GMT (9:45 PM Canberra time). A 25 basis point cut in rates from 1.25% to 1.00% is widely expected, as producer prices in the Eurozone fell the fastest in at least 22 years, printing −3.1% y/y on Tuesday, 5 May, with lower energy costs feeding through the production pipeline. It’s also widely expected that some form of QE suitable for the less cohesive organisation of the Eurozone will be at least discussed. Both of these announcements carry downside potential for EUR crosses. In particular, if the BoE holds and the ECB folds, EUR/GBP could slide below support levels at 0.8790 or 0.8600 and GBP/USD could consolidate above the psychologically important 1.5000 level.

The U.S. banking stress tests are more nebulous. Political leaks have been dripping for some time now, and financial markets have grown accustomed to the notion that many of the largest banks will require either additional private capital or a further influx of government funds. If financial markets remain accepting of that fact, then the stress test results, no matter how bleak, could be another non-event or possibly USD negative, particularly against JPY and the commodity dollars of Canada, Australia, and New Zealand. However, should a sell-off of banking stocks ensue, risk aversion could regain the forex whip hand, sending the usual safe haven currencies, including USD and JPY, higher across the board.

Forex traders are also reminded that liquidity is currently shallow, with many Japanese traders on holiday for the annual Golden Week celebration, and therefore currency movements are likely to be more dramatic than normal. With the usual precautions of tight and trailing stops, the potential for profitable trades is high.