17/09/2014: Markets remain cautious in front of the FOMC

Markets have once more settled into a consolidation phase as we look forward towards what would be a ground breaking meeting from the Federal Reverse tonight. Although the dollar bulls have wrestled back the initiative after yesterday’s wobble, there is still a sense of caution with the Fed announcement looming at 19:00BST.

The expectations of a change in the wording in the Fed statement have been pared over the past 24 hours, following a dovish assessment by Jon Hilsenrath at the Wall Street Journal, who is a keen Fed watcher and who has a history of getting these things right. Hilsenrath believes that the hawkish removal of “a considerable time” (when referring to how long rates would remain at record lows) may now not be seen.

However, this does not mean that the Fed will not begin the preparation for tightening. A traditionally dovish Janet Yellen may be able to appease all sides, by adding in something about the prospect of tightening being data dependent into the statement. If this is seen then the dollar would remain supported without a sharp strengthening that would hit pairs such as EUR/USD and GBP/USD if “a considerable time” were to be removed.

Prior to the Fed though is this afternoon’s US CPI inflation, released at 13:30BST. This could also drive dollar strength if it remains steady at 2.0%, although expectation is for a slight dip to 1.9%.

The euro is slightly weaker in front of the data, whilst Dollar/Yen has found a bid once more today and is not far from testing the 107.40 resistance again. However, one currency that is not being impacted by a stronger dollar is sterling, which has rebounded with some gusto in the past 24 hours. Hitting a low at $1.6160 a sharp move higher has put the sterling recovery back on track. The series of opinion polls last night suggesting that the “No” vote in the Scottish referendum had a lead of around 4 points. The strength in Cable would have been even greater, but the UK employment included wage growht which remains sluggish at just +0.7%. The moves have helped to push Cable above the key gap resistance at $1.6282, whilst a close above here tonight would be bullish.

The mood of consolidation is not confined to forex, also being seen in the precious metals and equity markets. Gold is just over $2 higher on the day and Silver is all but flat. Also, the initial rebound in European equities (after playing catch up on the late strength on Wall Street), the DAX and FTSE 100 have remained subdued through the morning. S&P 500 futures are forecasting a flat open to trading this afternoon.

As we approach the business end of this key week, the caution in the markets is almost palpable. We will know a lot more about forex direction after this evening’s Fed announcement, whilst for UK assets we may have to wait until the outcome of the Scottish Referendum to be truly sure.

 

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