Fed's Watershed Moment Arrives

The highly anticipated FOMC meeting takes centre stage today and could heighten volatility in the recent relatively calm currency markets. Markets expect the Fed to slow the pace of asset purchases anywhere in the range of $5 billion to $15 billion, the first instance of the Fed tapering its accommodative stance since 2008. Traders will also pay attention to the US housing data later today. At home, minutes of the latest BoE meeting revealed that policymakers unanimously voted to maintain policy measures unchanged. Retail sales and public finances data from the UK during the course of the week will be closely eyed for a more rounded view of the economy.

Pound Sterling – UK Markets

The Pound trimmed its earlier gains and slipped below the 1.59 mark against the US Dollar yesterday following the release of inflation data which showed that consumer prices fell for August, in line with market forecasts. Although inflation continued to stay above the BoE’s targeted 2% threshold, the marginal decline provided room to the central bank to keep its policy accommodative going forward. However, Sterling has moved higher against the majors in today’s trading session. The just released minutes of the BoE’s latest policy meeting has revealed that all MPC members voted in favour to maintain the status quo with regards to the current monetary policy. Traders are now keenly awaiting the outcome of the FOMC meeting later today and any kind of QE3 tapering could pressurise the Pound against the US Dollar. Besides, today’s Monetary Policy Committee meeting in the UK will hold attention, though the results of this meeting will only be published later next week. Apart from the crucial FOMC meeting, tomorrow’s domestic retail sales data is also likely to have a bearing on Sterling against the majors.

US Dollar – US Markets

The US Dollar is looking for direction against the Euro in today’s trading session, as market participants remain uncertain about the outcome of the Fed’s asset purchase programme. Today’s decision from the FOMC meeting is the most crucial event on traders’ radar and will affect risk sentiment. Currently, market participants expect the Fed to slow down its pace of bond purchases in the range of $5 billion to $15 billion, thereby taking the first step towards unwinding the current monetary stimulus. Market participants will look at the post-meeting press conference by the US Fed Chairman for gauging the long term strategy for liquidity withdrawal. Meanwhile, yesterday’s CPI data confirmed that inflationary pressures remain subdued for August despite the massive bout of liquidity induced by the US central bank. In a noteworthy development, the US Treasury Secretary, Jacob Lew, has once again issued a strong warning to the Congress on the dire economic consequences of delaying an increase in the government’s debt ceiling. Apart from the Fed meeting, today’s housing starts and building permits data in the US will be eyed for gaining some clarity on the impact of rising borrowing costs on the housing sector.

Euro – European Markets

Yesterday’s better than expected Euro zone and German ZEW sentiment indices provided some support to the Euro against the greenback. Data showed that economic sentiment in Germany rose to a three year high, while sentiment in the Euro zone also improved sharply on the back of a recovery in the region’s economy. The upbeat German sentiment brightens the country’s outlook, Additionally, data showed that trade surplus in the Euro zone widened in July primarily due to a revival in exports, further sign that the region’s economy is recovering. Meanwhile, Nicos Anastasiades, the President of Cyprus, indicated that the country’s capital control measures will be lifted by January 2014. In today’s trading session, traders have adopted a wait and watch approach ahead of the Fed decision, resulting in the common currency trading in a tight range against the US Dollar. With construction output being the only domestic economic indicator on tap today, trading in the Euro-US Dollar pair will undoubtedly be influenced by the outcome of the FOMC meeting.

Other Currencies – Highlights

The Japanese Yen has strengthened versus the US Dollar this morning ahead of the Fed announcement related to its bond buying programme. With expectations of a minor reduction to the US central bank’s QE3 plan remaining high, any weakness in the Japanese Yen in the day ahead could not be ruled out. Apart from the Fed meeting, a host of domestic economic releases during this week including merchandise trade balance and leading economic index will help in ascertaining the strength of economic recovery in the Japanese economy. Additionally, speeches from some top officials of the Bank of Japan will also eyed for hints on further moves by the Japanese central bank.