Greenback strengthens following not so dovish FOMC

In line with expectations, the Greenback strengthened across the board on Wednesday evening with the markets reacting more positively than expected to the FOMC statement. The Federal Reserve continued to reiterate that it will raise rates “a considerable time” after Quantitative Easing (QE) ends and the USD subsequently experienced some volatility, especially following Janet Yellen’s comments that there remained no “calendar date” for a rate rise. Overall, the USD made gains against most major currencies.

As widely expected, the Federal Reserve confirmed that QE is concluding in October and I think this confirmation was critical in the USD prevailing on Wednesday evening. Regardless of the Fed maintaining course in refusing to state a clear timeframe for a rate rise, investors have perceived the confirmation of QE concluding as a clear signal the Fed is moving in the right direction towards normalizing monetary policy. Overall, I do not think the FOMC statement can be deciphered as either “dovish” or “hawkish”; the Federal Reserve just maintained a consistent bias and will continue to monitor how economic data is performing, before transitioning towards a more hawkish view.

The EURUSD concluded trading at a new 2014 low (1.2851) which has already been surpassed by the 1.2839 low recorded this morning. The EURUSD had been trading in a narrow consolidation phase since the ECB shocked the market by cutting rates and raising deposits a fortnight ago, but now the pair has extended below the 1.2858 support level, and is preparing for a run down to 1.27.

The EU sentiment remains weak and the lack of confidence in the EU economy at present is clearly evident by the lack of market reaction to the EU CPI estimate surpassing expectations on Wednesday morning. While the Federal Reserve is slowly preparing to normalize monetary policy, there is always a threat of further action from the ECB. This discrepancy in economic sentiment should continue to see this pair gradually declining throughout September and it would not surprise if the pair ends the month around the low 1.27’s.

The Cable also softened on Wednesday evening, releasing any gains recorded earlier and concluding trading at 1.6248. Today is the long awaited Scottish referendum and investor nervousness ahead of the event may result in the pair trading narrowly until this evening. I am still expecting an overall “NO” vote and bearing in mind the Bank of England (BoE) have finally disclosed a likely timeframe for a rate rise (Spring 2015), I am expecting investor attraction towards the GBP to return shortly as long as the “NO” votes are in the majority.

While all focus is rightly on Scotland at present, it was confirmed on Wednesday morning that two members of the Monetary Policy Committee (MPC) voted for a UK rate rise for a second consecutive month. This shows a difference of opinion regarding interest rates is clearly taking place internally within the BoE, and a UK rate rise is edging closer to reality.

The USDJPY appreciated rapidly during the US session (100 pips), and concluded trading at 108.361. With Bank of Japan (BoJ) Governor Kuroda reiterating earlier in the week that while the BoJ are prepared to act if needed, there are no plans to do so at present led to the USDJPY’s buying pressure cooling down. However, as long as upcoming Japanese economic data continues to reflect the detrimental impact the April sales tax is having on Japanese expenditure, investors will continue to price in further stimulus at a later date. At the same time, an awareness from investors that the Federal Reserve are concluding QE shortly should enhance demand for the Greenback.

In the meantime, as long as US economic data can maintain consistency and JPY weakness continues, I am expecting this pair to make a run towards 1.10 before September concludes.