The lack of any meaningful U.S. economic data along with fear that the swine flu has the risk of turning into a global health crisis has caused investors to flock into the safety of the U.S. dollar. We have always said that when it comes to currencies, investors and traders always sell first and ask questions later.

As expected the Bank of England kept rates on hold at 50bp but also voted to continue with its GBP 75bn "Quantitative Easing" Asset Purchase Program, noting that "since its previous meeting a total of just over GBP 26bn of asset purchases had been made and that it would take a further two months to complete that programme".

The last full night of trade ahead of the Easter holiday for capital markets in Europe and North American was fairly quiet with both euro and pound contained to relatively narrow ranges while USD/JPY once again took out the 100 figure to the upside on the back of positive performance in the Nikkei. The jump in Japanese stocks was fueled by much better data on Japanese machinery orders and larger than expected stimulus package from Prime Minster Aso.

Markets today are exhibiting the usual signs of uncertainty in light of a new month that has not exactly gotten off to the best start. Among currencies, the Euro, Pound, Canadian dollar, and Australian dollar all showed weakness against the dollar. USD/JPY on the other hand clearly exhibited dollar strength, as a surge to 101.00 is currently under way. The one currency that has managed to buck the trend has been the New Zealand dollar which only narrowly is holding on to gains. Nevertheless, the main driving force is the drop on the Dow today. However, as a sign of resilience in even a down market, the Dow rebounded off of exaggerated losses that extended down by nearly 150 pips to close down 41.74.

The GBP/USD is poised for an intraday break-out as prices have been trapped within a narrow range.

An update to this morning's GBP/USD and EUR/USD trades....

In a move that surprised no one Bank of England cuts rates by another 50bp to 0.5%. Additionally, in a first detailed communication to the market as to how it intends to pursue quantitative easing to help stimulate the moribund UK economy, the central bank announced that it will purchase up 75 Billion GBP of securities by using its own reserves.

The two biggest event risks for currency traders over the next 24 hours are the Bank of England and European Central Bank interest rate decisions.

It has been a rough day in the financial markets with the Dow Jones Industrial Average and S&P 500 falling to the lowest level in 12 years.

Based upon the price action in the currency market, one would assume that risk appetite is improving. However, if you took a look at the sell-off equities, it suggests otherwise. Over the past few months, there has been a strong correlation between these two instruments with equity market weakness driving USD/JPY lower. Unfortunately this correlation has decoupled today, leading currency traders to wonder which asset correctly reflects the market’s appetite and why there is a decoupling.

There were no coordinated moves in the currency market today with the dollar rising against the Euro, British pound and Japanese Yen but falling against the commodity currencies. US stocks oscillated between positive and negative territory as bleak forecasts from the Federal Reserve offset optimism from President Obama’s Mortgage Plan. It is quite discouraging that the financial markets have not responded positively to the numerous programs announced by Obama since he has taken office. Apparently he is not as effective in bolstering investor confidence as he has been in boosting public confidence prior to his election.

The minutes of the Monetary Policy Committee meeting revealed that the Bank of England voted unanimously to support quantitative easing as authorities attempt to employ every policy tool at their disposal to stimulate the moribund UK economy. The MPC also voted 8-1 to lower rates by 50bp with David Blanchflower once again reaffirming his dovish stance by opting for a 100bp cut.

On a night when the rest of the G10 currencies consolidated their losses in listless, event free trading, cable was the main source of action dropping 200 points from its highs on news that Bank of England voted unanimously for quantitative easing. The BOE voted 9-0 to expand its monetary policy initiatives beyond rate cutting and 8-1 to lower rates by 50bp with Blachflower once again calling for 100bp cut.

As expected the BoE cut the overnight lending rate by 50 basis points to 1.00% - the lowest UK rate in the 300 year history of the central bank. BoE cited the risk of a substantial undershoot in the country’s inflation rate and noted that the series of rate cuts will eventually have a significant impact on the UK economy.

The US dollar traded higher against the Euro and commodity currencies but remained unchanged against the British pound and Japanese Yen. The strength of the dollar can be attributed to three primary factors.

Over the next 24 hours, the Bank of England and the European Central Bank will be making interest rate announcements. The Bank of England is the only central bank expected to cut interest rates, but that does not mean that the Euro stay stationary. In fact, we expect some big action in both currencies, which could lead to more volatility for EUR/GBP.

In what may be a small glimmer of hope, UK PMI Services printed better than forecast at 42.5 against 40.3 suggesting that UK economy may be finally showing some signs of stabilization. This was the third consecutive PMI reading this week that surprised to the upside lending more credence to the sterling bullish view that the worst of the UK contraction may be over.

There are 3 interest rate decisions on the calendar this week from Australia, the United Kingdom and the Eurozone. Only 2 out of the 3 countries are expected to cut interest rates but all 3 rate decisions and the corresponding comments from central bank officials should trigger some volatility in the currency market. Although the amount of easing is important, what will receive more attention are the comments on how much further these central banks could cut interest rates. The upcoming rate cut is not expected to be the last for the Reserve Bank of Australia or the Bank of England and the expectation of further rate cuts could prevent a major recovery in the Australian dollar and British pound.

Although the Federal Reserve did not change interest rates this afternoon, the FOMC announcement led to a significant amount of volatility in the currency market. In our FOMC Instant Insight, we talked about how the dollar rallied because the Fed said that they “may” and not “will” start buying US Treasuries. The market was looking for something more radical such as inflation targeting or a bold announcement that they will immediately start buying long term Treasuries in size, which would have been dollar bearish. In the grand scheme of things, the Federal Reserve delivered nothing new today. So with that in mind, what should we expect now that the FOMC meeting is behind us?

The Federal Reserve is currently holding a two day monetary policy meeting and it will be interesting to see whether they are desperate enough to introduce radical programs that can incite the enthusiasm of investors. With interest rates virtually at zero, a rate cut is not expected, but the central bank is under pressure to take further action. So far, their effort which includes 500bp of easing has helped to prevent the recession from turning into a depression but it has yet to stabilize the economy. The latest string of economic data indicates that the US economy is still on a downtrend and headed lower. The FOMC rate decision tomorrow could be a nonevent for the US dollar, but if the Federal Reserve is desperate enough, they still have the power to surprise the markets.

For the first time since August 2007, the Federal Reserve is not expected to change interest rates. With the fed funds rate now set to a target range of 0 to 0.25 percent, the Federal Reserve has maxed out on their most conventional monetary policy tool. Although they still have different ways of adding liquidity to the financial system and stimulating the economy, what was once the second most market moving event risk for the foreign exchange market could become a non-event. Going forward, traders may have the same disregard for FOMC rate decisions as they do for Bank of Japan meetings. The only way for Wednesday’s FOMC rate decision to hurt the dollar would be if the central bank announces that they will be purchasing long term US Treasuries in size or if they add more ingredients to their alphabet soup of new programs. There is nothing to support the dollar on the upside as the Fed is not expected to start talking about raising interest rates.

The US dollar and the Japanese Yen, the two lowest yielding G10 currencies continue to be the two best performing. It is important to remember that the dollar and the Yen are not rallying because investors have grown more optimistic about those currencies but because they are more pessimistic about the outlook for the US and global economy. We have seen an unusual amount of currency related comments made by central banks and government officials around the world because of the sharp rally in the dollar and the Japanese Yen. As these currencies continue to rise, the risk of a reversal grows. Tim Geithner has been confirmed as the new US Treasury Secretary but rather than cheer his confirmation, analysts are worried about some of the comments he made at his confirmation hearing.

It is not often that we can see the US dollar hit a 23 year high against one currency and a 13 year low against another on the very same day. However that was exactly what happened this morning when the greenback surged against the British pound and collapsed against the Japanese Yen. Volatility ripped through the foreign exchange market as central bank and other US officials comment on their economies and currencies. The milestones were not limited to the GBP/USD and USD/JPY as the NZD/USD and EUR/JPY also fell to a 6 year low intraday. However what was most impressive is the fact that none of the staggering losses were sustained.

After climbing back to 1.4000 in early Asia session on profit taking by the shorts GBP/USD tumbled for the third night in a row as traders treated the currency as though it was covered in radioactive waste. An article in London Times which basically called for selling every UK asset was the trigger for the latest downdraft, and the overnight economic data did little to bolster the case of pound bulls.

The US dollar is selling off aggressively ahead of Friday’s non-farm payrolls report on the fear that for the second month in a row, job losses may have topped 500k. The recent moves in the currency and equity markets suggest that everyone expects a very weak labor market report. Although the consensus forecast is -520k, the whisper number is closer to -650k to -700k. Sentiment is strongly skewed in one direction which can be dangerous considering the fact that some of the leading indicators for non-farm payrolls call for a rebound.

Bank of England dropped the benchmark UK interest rate to 1.5% easing by 50bp as expected. The Monetary Policy Committee noted that the sharp drop in the pound provided additional stimulus to the UK economy tempering the need for more drastic rate cuts at the present time. The Central Bank acknowledged the severity of the UK recession stating that business and consumer confidence have declines markedly while noting that output is likely to drop sharply in the first half of 2009.

The anti-dollar rally continued in Asian and early European trade today in the aftermath of yesterdays surprising -75bp cut by the Federal Reserve, but the pace of gains was decidedly more muted as currency traders booked profits in the wake of lackluster equity market performance and downcast economic data from UK.