While we outlined the reasons behind the Euro’s fall in today’s session – sovereign debt worries resurfacing – we also had an interesting development from the US monetary policy side.

A report by an influential think tank – the Medley Advisors – said that the Fed in its FOMC meeting next week will re-affirm its commitment to its current round of $600 billion in quantitative easing but that several members may “grow restless” about an open-ended commitment to ultralow rates.

Since the news coincided with other USD positive factors in today’s trading it helped to boost the USD.

The report suggests that the Fed may be considering dropping its language that calls for keeping its key interest rates at ultra low levels for an “extended period” – a term that has been interpreted to mean for at least another 6 months.

The USD has been suffering for several weeks now as a result of the Fed’s policy on interest rates as other central banks are gearing up for interest rate increases as a result of higher inflation. This has been a major drag for the USD against the EUR, but also against the GBP.

We have been waiting for the moment that the Fed sees incoming US data as strong enough to began signaling some form of exit strategy. Most recently the non-farm payroll data showed the economy adding 192K jobs in February, a figure that was thought to be insufficient to sway the FOMC’s stance on monetary policy.

If not next week’s meeting, speculation will build for this call for an exit strategy in the following meeting if US data continues to point towards an economy gaining momentum.

The prospect of higher interest rates would help to keep a lid on inflation and would increase US yields. Investors are looking for higher yields and the growing difference between interest rate differentials between the US and its rivals has, again, been a driving force in currency markets of late.

If the Fed sound a more upbeat tone on the economy next week, then we can take this report from Medley more seriously, and it could have an important implication for longer term trends in the market.

For now, its an indication of things to come, and we’ll have to continue to monitor the statements and comments from Fed officials as well as the FOMC statement we get next week.

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