Today is Sun, November 19, 2017 13:21:49 GMT
RSS Follow Us Follow us on Twitter Friend us on Facebook
Currencies AUD Forex: Aussie Dollar, Yen Vulnerable on Status Quo FOMC Outcome

Talking Points:

  • Quiet European Data Docket Puts Spotlight on Fed Policy Announcement
  • Another $10bn QE Reduction, Unchanged Forward Guidance Expected
  • Yen, Australian Dollar May Underperform on Status Quo FOMC Outcome

A quiet economic calendar in European trading hours is likely to see currency markets looking ahead to the outcome of the much-anticipated FOMC policy announcement for direction cues. Expectations call for another $10 billion cutback in aggregate QE, spread evenly between purchases of MBS and Treasury bondsecurities. While a mixed tone to US economic news-flow in recent weeks has introduced a degree of speculation about a pause in the “tapering” process, commentary from Fed officials has forcefully dismissed such concerns, suggesting stimulus reduction will proceed as advertised.

Confirmation of another $10 billion cutback would effectively mark the policy status quo established in December’s meeting. With that in mind, traders will be keen to dissect the text of the statement accompanying the announcement. On this front, the spotlight will be on any changes in the forward-guidance framework. The US unemployment rate averaged 7.3 percent in 2013, a hair higher than the 7.0-7.1 percent range expected by the FOMC in December’s updated set of economic forecasts. Meanwhile, inflation expectations derived from bond yields (so-called “breakeven rates”) are pointing to price growth below 2 percent in the next 1-2 years, hinting the Fed’s 2.5 percent bound is not in danger.

On balance, this points to a lack of urgency in tinkering with any of the central bank’s key strategy components in the near term. Such an outcome may reignite interest in the Fed’s gradual shift away from the dovish extreme of the monetary policy spectrum, pushing US Treasury yields higher and boosting the US Dollar. Spread-sensitive currencies including the Australian Dollar and the Yen appear likely to bear the brunt of a USD rebound, but currencies attached to central banks whose policy trajectory is relatively dovish compared to that of the Fed including the Euro, Swiss Franc and the Canadian Dollar are also at risk. We remain short EURUSD.

Asia Session

European Session

Critical Levels

Recent posts by DailyFX