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FX:  Leaders of the G8 area set to meet today and tomorrow. There is low risk of a statement that will be focused on FX, with other issues higher up on the agenda.

USD:  The Empire manufacturing not a big one for the dollar, with main focus on the CPI data tomorrow and Fed decision Wednesday (see below).

Idea of the Day

Since the early part of May, the dollar has gone up the stairs and down the lift shaft on the back of shifting expectations regarding the Federal Reserve. Last month, it was pushed higher on the fear that officials were talking more openly and strongly about ‘tapering’ the amount of bonds the Fed purchases on a monthly basis. This month, we’ve seen a strong reversal.   This has partly come about on data falling to the disappointing side, which was already happening during May, just that the market was choosing to turn a blind eye to it.

The significance of this can also be seen in many measures of uncertainty, such as options pricing. The Fed has been feeding markets on and off for the best part of 5 years. As such, they have become very sensitive on the possibility of this round of QE being withdrawn, even if only slowly. For its part, the Fed has had one too many false dawns along the road and wants to be sure that things are improving before it takes such a step. So what does this mean for the dollar this week?

Relatively constrained for the first half, but if anything the risks are towards the Fed implementing some subtle shifts in language hinting towards tapering to come, which would provide some support for the latter half of the week.

FOMC Preview:  A mild hawkish change? 4 scenarios for the Fed decision

Latest FX News

GBP:   Latest news on house prices, released overnight, showed the annual rate increasing to 2.7% (from 2.5%), this coming from the Rightmove measure.   Sterling managed some modest outperformance vs. the euro last week, but still sitting close to 200 day moving average on cable, currently at 1.5698.

AUD: Undertaking its second corrective phase, the first one earlier this month proved very brief.   So far, this rally is looking a little more enduring, AUDUSD up 3% from the lows seen last week.  

JPY: The yen was the strongest performer last week, as the market’s faith in ‘Abenomics’ continues to waver.   Low of USDJPY 93.79 the initial support, but market likely to be constrained ahead of Fed meeting on Wednesday.