All Eyes on FOMC Statement and Projections - 18.9.2013

The US dollar index remains steady in 81.19/81.07 tight range ahead of the release of the two-day FOMC policy meeting outcome. It is generally expected that the Fed would start reducing its $85B program. Market consensus is that the Fed most likely will cut down purchases of the long-term Treasury securities from $45B to $35B and MBS purchases program could be tapered by $5B, falling from $40B to $35. Thus we are expecting a $10B-$15B reduction today to be announced by the Fed alongside with FOMC projections.

As you can notice on Fundamental Analysis table, US Unemployment Rate dropped from 8.1% in August 2012, just before starting MBS purchases at $40B pace per month, to 7.3% in August 2013. Indicating that the accommodative policy succeeded in increasing employment and thus economists consider that continuation would destabilize financial markets. However, recent figure on Employment has been disappointing together with the downward revision of the July employment, as a consequence uncertainty increased over how much the bond buying program would be tapered.

The single currency versus the greenback was also in sideways trading near its recently earned resistance at 1.3381 since it was underpinned yesterday by improved ZEW Economic Confidence indicator. It is likely to remain in 1.3381/1.3321 tight range until FOMS Statement.

The Bank of England is also going to release its minutes of the September 5 meeting which includes the Asset Purchase Facility votes and the key rate votes. Economists’ project is that all 9 members of the committee unanimously voted to hold policy unchanged. The British pound against the US dollar eased to 1.5887 from 8-month peak at 1.5961, weighed by key resistance and amid some profit taking. Traders are reluctant to act before Bernanke’s statement.

Lastly, the USDJPY is also fluctuating in 99.35/99.02 sideways zone looking ahead for Federal Open Market Committee announcement. Even though we have built up a consensus that Fed would modestly scale back quantitative easing we would avoid betting on that since we consider risk taking greater than potential reward.