The Greenback unexpectedly slipped against its counterparts overnight following growing speculation that Wednesday’s FOMC statement will deliver a dovish tone, while continue to suggest that a US interest rate hike remains “a considerable time” away. While I agree the interest rate rise is still a way off, I am not confident that this evening’s FOMC statement will be dovish.
The Federal Reserve are likely to confirm that Quantitative Easing (QE) is concluding in October, which should encourage Greenback strength. Investors should perceive confirmation of QE concluding as a strong signal that the Fed are confident in the US economy’s ability to stand on its own, without QE. Additionally, this should also reaffirm to investors that the Fed are moving in the right direction towards normalizing monetary policy, regardless of whether they are ready to offer a timeframe for a rate rise.
Saying that, I continue to expect a US rate rise around September 2015. Although a number of US economic indicators have certainly improved over the summer period, the US economic recovery has remained a long, drawn out process. The withdrawal of QE in itself has taken nearly a year and the Fed are going to be closely monitoring how the US economy is coping without QE until at least the beginning period of 2015. When the Fed are content with the US economic progression without QE, this is when internal discussions for a US rate rise will advance.
Although the EURUSD has traded narrowly since the ECB surprised by cutting rates and raising deposit rates a fortnight ago, I will continue to monitor the pair tonight. The pair has recently struggled to advance towards 1.30 on several different occasions, finding resistance between 1.2960 and 1.2994. If the markets are disappointed by the Fed tonight but the pair still fails to meet 1.30, it would confirm to me that we are likely looking at a current ceiling for the Euro Dollar.
On the other hand, EU economic sentiment remains weak and if the Federal Reserve unexpectedly excites the markets this evening, we shouldn’t rule out potential downside moves towards the current yearly low, 1.2858.
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