EUR/USD Narrow ranges prevailed ahead of the Fed statement with the Euro again faltering at resistance levels. A decline in German import prices maintained concerns over further downward pressure on inflation. There were mixed comments from ECB officials who suggested there was a significant lack of harmony within the central bank. Italian representative Constancio pointed to a lack of demand within the Euro-zone economy. In contrast, Estonian member Hansson stated that there was no convincing reason for further action in December and pushing back against the dovish assumptions. The latest US goods trade deficit was lower than expected at a 7-month low of US$58.6bn from US$67.2bn. As well as underpinning dollar sentiment, there were also upgrades to the third-quarter GDP estimates with flash data due Thursday. As expected, the Federal Reserve left interest rates on hold following the latest FOMC meeting. The statement again referred to the economy expanding at a moderate pace while there had been further net improvement in the labour market, although the overall tone was less confident. Richmond head Lacker again dissented and called for an increase in rates. Two elements were more hawkish than expected as the Fed first removed a line from the previous statement that global economic and financial developments may restrain economic activity somewhat. There was also a specific reference to the December meeting with comments that the committee will assess realized and expected progress towards maximum employment and 2% inflation in determining whether to increase rates. Markets judged that the overall probability of a December move had increased with futures markets suggesting the chances were near 50%. In response, there were sharp dollar gains against European currencies with the Euro sliding to lows near 1.0900 before a limited recovery on Thursday
JPY The dollar was able to hold a solid tone into the Fed statement on Wednesday with some support from an underlying rise in US yields during the session. Following the Fed statement there was a further sharp move higher in yields with 10-year rates moving briefly above the 2.10% level. The dollar initially pushed sharply higher towards the 121.00 area before being undermined by a sharp drop in equity markets. There was a reversal in trends late in New York as stocks rallied sharply and this pushed the dollar above the 121.00 level as risk appetite improved. There was a stronger than expected release for industrial production with a 1.0% monthly gain which provided some optimism surrounding the outlook and also tended to dampen expectations that the Bank of Japan would ease policy further at Friday’s policy meeting. In this environment, the dollar edged weaker with markets braced for high volatility after the bank’s decision.
GBP Sterling was initially on the defensive against the Euro on Wednesday with a move to the 0.7240 area and there was also a fresh test of support below 1.5300 against the dollar. There was a suspicion of month-end Sterling selling which had a negative impact. Yield spreads against the Euro widened later in the European session which helped underpin the UK currency and there were no major domestic developments. There was a further shift following the Fed meeting with an increased probability that the Fed will tighten in December also raising the possibility that the Bank of England would be more likely to raise interest rates within the next few months. In this environment, there were gains to around 0.7150 against the Euro while there was support near 1.5250 against the dollar.
CHF The Euro pushed to a peak around 1.0900 against the franc on Wednesday before being dragged lower on wider weakness. There was another sharp move higher in the US currency as it peaked above 0.9950, pushing it above August highs and to the strongest level since mid-March. There was sharp franc selling on wider US gains with the currency also hampered by the rally in equity markets which curbed any potential defensive franc demand. ECB comments will continue to be watched closely given the expectations of December easing.