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The pessimistic sentiment that saturated financial markets yesterday has abated, though participants remain cautious ahead of the conclusion of the FOMC’s two day policy meeting.   Asian markets were able to shake off yesterday’s wash-out on Wall Street, with a blockbuster earnings report from Apple that helped boost sentiment and consequently lifted the Nikkei of its earlier lows to finish its session up by 0.15%.   The yen was fairly quiet during the overnight session, as the consolidative forces that pushed USDJPY lower yesterday dwindled, causing the pair to trade comfortably just below the 118 handle.

The overnight session was a volatile one for the aussie, with sharp moves on the back of economic data releases and central bank rumors.   Inflation figures for the Australian economy during the fourth quarter were released overnight, and while headline consumer prices softened more than expected ( 1.7% on an annualized basis from the 2.3% registered in Q3), the RBA’s preferred measure of inflation (the trimmed mean) beat expectations with a rise of 0.7% when compared to the previous quarter.   AUDUSD quickly bounced on the sticker than expected core measure, but the strength was rapidly faded as rumors of a rate cut next week from the RBA began to circulate.   The swirling rumors of further monetary policy easing from the Australian central bank to combat disinflationary pressures and stimulate growth stopped the aussie’s run dead in its tracks, and with index swaps pricing in close to a 50% probability of an interest rate cut at next week’s monetary policy meeting, AUDUSD reversed its overnight gains and the pair was sent back to pivot in the high-0.79s.

Despite the dark cloud that shrouded global equity markets having lifted to some extent, European bourses have been unable to take advantage of the rebound in sentiment this morning.   The major equity indices are struggling to keep their head above water, although the losses to this point have been modest.   The failure to see a recovery in risk appetite stems from nagging concerns with the new Syriza government in Greece, and while Tsipras has promised to avoid a “catastrophic clash” with creditors, investors are yet to take the new leader at face value, pushing yields on 10yr Greek debt to over 10.5% and widening the spread between comparable German notes.   The euro has ceded some of yesterday’s gains against the greenback, though remains elevated with EURUSD pivoting in the mid-1.13s.

Heading into the North American open, all eyes are on the conclusion of the Federal Reserve’s monetary policy meeting, and the statement set to be released at 14:00EST.  Market participants will be parsing the language in the statement for any perceived changes in forward guidance, specifically whether the Fed still has the ability to remain “patient” in regards to normalizing monetary policy.   Given there is no press conference following up the release of the statement, we believe the Fed will shy away from utilizing any new language or making changes to forward guidance today, with the resulting statement being very similar to the one seen in December.   If there are any tweaks to the language or overall feel of the statement, we would put the risk on the press release containing a slightly dovish slant, highlighting the disinflationary winds felt on a global basis, along with the drag exports and corporate earnings will feel due to an appreciating USD.   A modestly dovish statement without altering forward guidance would likely allow the USD to resume its consolidative price action witnessed yesterday, as we feel there are short-term technical issues at play whereby the USD has some further froth to be culled before taking another leg higher.

Further reading:

EUR/USD making a double zigzag; GBP/USD in a flat correction – Elliott Wave Analysis

Fed Preview: USD buy opportunity on “business as usual”?