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Tension builds ahead of next Wednesday’s FOMC meeting as

By Alex Edwards at  UKForex, an international money transfer service.

This has been a steady week for the pound.   It traded above 1.6450 against the dollar  on Tuesday, as supportive comments from BoE Governor Carney and upbeat UK Manufacturing Production supported GBP across the board.   This came despite the strong US payrolls and GDP data a week previous and successful US budget negotiations this week – an agreement was reached to fund the US treasury for a further two years and to reduce the government deficit by $23 billion, thus avoiding another shutdown come  January 15th.

Stronger than expected US Retail Sales data released  on Thursday  then saw GBP/USD fall back towards and under resistance at 1.63.   This, as well as the House of Representatives passing its budget agreement, is fuelling expectations for a Fed taper before the New Year.   That said, this agreement by no means resolves the debt ceiling issue and an increase in said ceiling is required by early February.   A Fed taper is not fully priced in either, as there remains some concern still about the low level of price inflation within the US economy.   It therefore goes without saying that next week is all about the FOMC meeting  on Wednesday.   Other major events of interest include UK CPI, Unemployment and the BoE MPC Minutes.

As for the euro, we were left scratching our heads as EUR/USD traded through 1.38 this week.     There was no obvious or fundamental reason for the move – it seems markets are still buoyed by President Draghi and other ECB officials announcing a week prior that they did not discuss any specific monetary tool at their monetary policy meeting.   It drifted a little lower  on Thursday  and  Fridayafter the ECB lowered the area’s inflation forecasts.   ECB President Draghi spoke again  on Thursday, and despite these lower inflation forecasts, he said that he did not expect to see deflation.   In almost the same breath he said that the central bank stood ready to act and that they have plenty of instruments still at their disposal (this despite interest rates sitting at 0.25%).   We remain bearish EUR/USD.

The Aussie dollar broke down late in the week after RBA Governor Stevens was quoted in the Australian Financial Review as saying “85 would be closer to the mark than 95″ and with regards to the medium term said “it’s going to be surprising if a nine at the front is the right number”.   He went on to say that although the central bank has not intervened yet, it “doesn’t mean that we’re saying never, and I just wanted that to be understood”.   We expect AUD/USD to remain on the back foot for the early part of next week, but we think it likely we will see profit taking on short AUD positions heading in to the much anticipated FOMC announcement  on Wednesday.

In contrast, NZD was supported by hawkish comments from RBNZ Governor Wheeler, who signalled following the monetary policy statement that they would likely raise the OCR in the first quarter of 2014, as opposed to the second quarter as previously indicated.   The central bank also upgraded growth forecasts for the NZ economy.   We expect this outlook and monetary stance to support the kiwi at the end of 2013 and during the early part of 2014, as the currency attracts yield demand.

More:  Tension builds ahead of next Wednesday’s FOMC meeting as markets look for signs of a Fed taper