FOMC Approaches, Taper Question Remains

CSS Daily FX Update and Outlook for 29th January 2014

Update:

US Dollar Index – (+0.1%)
• The currency markets on Tuesday remained quite range bound ahead of the key FOMC meeting on Wednesday. There were some market developments that caused a certain amount of friction during the session, but nothing that produced a sustained reaction. The USD index basket was up 0.1% at time of writing, with the greenback making gains against the EUR, JPY, CHF and CAD, whilst losing ground to the AUD and GBP. The following is a summary of the day’s events.
• India raised interest rates overnight, a move that wasn’t expected, and carried out by the RBI to control inflation. The central bank went on to say that they were now better equipped to deal with capital outflow risks and don’t foresee the need for further tightening in the near term. Interest rates were hiked 0.25% to 8% on anticipation of high consumer price inflation.
• Pressure returned on the single currency during the morning session, with the EUR/USD cross sinking back to a low of 1.3630. Peripheral economic data had little influence, despite both Italian and French consumer confidence indexes outperforming consensus.
• The highlight of the morning session came in the form of UK Q4 GDP data. The UK reported growth in line with expectations, with the economy growing by 0.7% in Q4, slightly down from growth of 0.8% in Q3, and expanded 2.8% from a year earlier. On an annual basis, British GDP was 1.9% in 2013, up from just 0.3% in 2012, which amounts to the fastest pace of growth since 2007. Despite this showing that the UK economy is firming up and experiencing a much better outlook than that of Europe, the result was still as forecast, and the GBP experienced a slight sell-off. Cable dropped to an intraday low of 1.6540 after the report.
• These gains for the USD would probably have been maintained on the day, if it wasn’t for poor US economic data in the afternoon session. Core durable goods orders dropped considerably, down 1.6% month on month, compared to forecasts for a 0.5% monthly rise. The USD quickly weakened, with yet another data set questioning the true health of the US economy. EUR/USD bounced back to 1.3685, whilst GBP/USD also tipped back above 1.6600. A much better number in the form of CB consumer confidence was greatly received, rising to 80.7 in January from a downwardly revised reading of 77.5. that was enough to tip the market back the other way, leading to gradual dollar strength returning as the afternoon session progressed.
• Trading on Wednesday is obviously dominated by the eagerly awaited FOMC meeting. Although market commentators still appear to be siding with another mild tapering by the Fed, we’re unconvinced, believing that there is too little evidence to support that scenario. As we have mentioned, if the Fed do indeed hold fire, then this could prompt some short term USD weakness to take advantage of.