The U.S. dollar which was weaker than most currencies for the past week, saw some small gains as all eyes turn to the Fed meeting which begins today and ends tomorrow, and will announce interest rates decisions.
Volatility will linger no matter what the Fed decides according to experts who believe that announcing an interest rate hike at the end of the two day FOMC meeting will send waves through markets, while deciding not to raise interest rates will prolong the guessing game and therefore keep volatility on the rise.
“There is a general consensus in the market that the Fed meeting will continue the volatility, and if they don’t do anything it may sustain the volatility at least for six more weeks till the next meeting” said J.J. Kinahan, Chief Strategist at TD Ameritrade in Chicago.
This streak of volatility started a month ago when Chinese stocks took a plunge and the People's Bank of Japan devalued the yen by 4 percent.
Expectations which were settled on a September rate hike have thinned after a series of disappointing data in the U.S. and meltdowns in two of the world's largest economies; Japan and China.
Data released on Tuesday showed a 0.2 percent increase in retail sales for August which fell short from the 0.3 percent increase expectations. Core retail sales excluding automobiles added 0.1 percent in August lower than the expected 0.2 percent. US industrial production fell by 0.4 percent for August more than the expected 0.2 percent decline.
Fed Chair Janet Yellen had expressed two conditions for a rate hike; one being a good economic condition in the US which can accommodate a rate hike, the second was having no threats from global economic situations. With both conditions unfulfilled at the moment, bets are on delaying the rate hike till December. An opposing theory however expects the Fed to raise interest rates and let global markets just deal with it.
“There’s an argument for getting it out of the way so that markets know what they’re dealing with. For most people the uncertainty of the last couple of months, if repeated every two months would be found to be somewhat weary” said Nick Parsons from National Australia Bank.
EUR/USD fell on Tuesday afternoon tumbling below the 1.13 level for the first time in four sessions.
The pair traded between 1.1259 and 1.1321 during Tuesday's session, it settled at 1.1269, 0.48% lower. EUR/USD was expected to find support at 1.1017 and resistance at 1.1562. Previously the Euro had been gaining for eight straight days before breaking the cycle on Tuesday as markets anticipated the Fed Meeting which convenes today and will go on till tomorrow.
Last night AUD/USD lost 0.10 percent trading at 0.7134, while USD/JPY lost 0.05 percent to 120.36.
The U.S. dollar index which measures the greenback against the basket of six major currencies added 0.06 percent to 95.70 on Tuesday evening.