Risks around the Fed

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Idea of the Day

This is the last full trading week of the year, but it should be a pretty interesting one. The Fed stands tall over the agenda, their two day meeting starting tomorrow. The prospects of the Fed reducing the amount of monthly bond purchases (tapering) have increased through December, this being reflected in the rise in the 2 year yield in the US through December. We would put the chances of this happening at 40%. The impact of this would immediately be felt on the dollar (firmer) and also equities (weaker). But because the Fed has moved to assure market that tapering does not mean interest rates are going up any time soon, the impact should not be as dramatic as would have been the case if the Fed started tapering in September.

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Data/Event Risks

EUR: The advance PMI data always worth a close eye as they are the first indicator of economic activity for the Eurozone for December. Both manufacturing and services series are seen rising modestly. Stronger data would help offer further support to the euro, but it is looking a little tired at these levels.

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EUR: The euro has continued to perform relatively well during December, helped by a number of factors, including rising money market rates as banks adjust their balance sheets ahead of the upcoming stress tests. The recent high at 1.3811 remains the initial focus on the upside, but there is definitely a sense that the single currency may be starting to feel a little tired.

AUD: The move below the 0.90 level seen last week, on the back of comments from RBA’s Stevens, has been sustained. A push below the low for the year at 0.8848 remains a possibility, especially if the Fed does choose to taper its bond purchases this week.

CNY: The latest HSBC PMI data for the manufacturing sector a little weaker than expected, rising 50.5 against expected increase to 50.9. The impact was limited on the Aussie and elsewhere, with both CNY and CNH trading close to the 6.0720 level.

Further reading:

GBP/USD: Trading the British CPI

French PMIs disappoint – EUR/USD slides

Get the 5 most predictable currency pairs

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