Risk is returning to the forex market, and one of the beneficiaries is the euro. However, the euro success in forex trading isn't just due to the return of risk appetite. There are some reasons that the euro is returning to favor. 

GFT's Kathy Lien offers three reasons that the euro is gaining support in forex trading. She shares them in FX360:

1. Concern fading with regard to sovereign debt: The situation with Portugal, Ireland, Italy, Greece and Spain is easing, and the ECB's lending facility went well.
2. U.S. in focus: Instead of focusing on the euro zone and its troubles, forex traders are now looking at the U.S. and seeing some of its weak fundamentals. The result is a stronger euro in forex trading.
3. Short squeeze: Rebounding EUR/USD has resulted in a short squeeze.
   

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• Euro in Forex Trading
  Trading on the currency market

Yesterday, the Fed issued its policy statement about the economy. Just a couple of months ago, the statement appeared almost optimistic, with the belief that the economy is more supportive of growth.

However, things have changed in the last little while. With European debt concerns, and continued trouble in the employment situation and the housing market, the Fed has softened its stance on the economy.

Indeed, GFT's Kathy Lien reports in FX360, the Fed's tone has turned more cautious:

This month’s statement did include a few changes, most of which pointed toward a worsening environment. The Fed said that “financial conditions have become less supportive of economic growth, largely reflecting developments abroad.” This is compared to their April meeting when they said that conditions were ‘more’ supportive of growth. By recognizing difficulties abroad, the Fed is to some extent acknowledging the fact that the U.S. will see some spillover from the European crisis.

The U.S. dollar moved lower on the economic fundamentals, but is now gaining some degree of strength in forex trading from the resulting risk aversion.

See Also

• Economic News and the U.S. Dollar
  Forex trading on the currency market

The U.S. Federal Reserve Open Market Committee begins a two-day policy meeting today, and there is speculation about what will come out of it. While no change is really expected in terms of policy or rates, there is some speculation that some aspects of the forecast could be softened.

While the Fed is expected to continue to claim that the economy is likely to experience moderate growth, some aspects of the economic forecast are likely to be softened. TheStreet reports on some of the likely changes to the economic outlook:

That said, investors should expect some changes in the Fed's economic assessment. While the FOMC is still likely to anticipate moderate growth, it may tweak several factors lower, giving a softer cast to its overall assessment. For example, previously it said that "growth in household spending has picked up," but now after two disappointing retail sales reports, the Fed may downgrade its assessment. Housing starts also appear weaker than the Fed previously noted. Financial markets are somewhat less supportive of the economy as well, with LIBOR having risen, and the equity market roughly 10% lower than when it met last time. Global factors are also not as supportive, given recent European developments.

The U.S. dollar is mixed this morning, higher against the euro in forex trading, but lower against the sterling.

See Also

• Economic News and Forex Trading
  Forex trading on the currency market