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Forex: Markets Primed for Dovish FOMC Outcome May Be Disappointed

By , Currency Strategist
30 October 2013 07:42 GMT

Talking Points

  • Euro Unlikely to See Strong Response to German Jobs, Inflation Data
  • All Eyes on FOMC Outcome as Markets Gauge QE “Taper” Timing
  • US Dollar May Rise if Fed Officials Show No Clear Dovish Tone Shift

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German Unemployment and CPI figures headline the economic calendar in European hours. The former data set is expected to show no change in headline labor market indicators in October, with the ranks of the jobless holding steady from the prior month while the unemployment rate remains at 6.9 percent. The latter report is forecast to see the baseline year-on-year inflation rate holding at 1.4 percent, matching September’s result.

On balance, such outcomes offer no meaningful impetus for markets to re-appraise status-quo ECB policy expectations, and as such seem unlikely to yield much of a reaction from the Euro. Overall Eurozone economic news-flow has deteriorated relative to expectations over the past two months according to data compiled by Citigroup. While this opens the door for downside surprises, the probability of an outsized reaction from the single currency (much less of seeing lasting follow-through) seems rather low before the markets can put today’s FOMC policy announcement behind them.

Needless to say, investors are looking to the Fed meeting to offer guidance on when officials will begin to “taper” the size of the QE3 stimulus program. Fiscal drag considerations following October’s US government shutdown have pushed back expectations on when the policy normalization process will commence, with the baseline view now looking for the first cutback in March 2014.

The incorporation of this view into asset prices weighed on the US Dollar over recent weeks, dulling the impact of any overtly dovish rhetoric that may emerge in the FOMC policy statement. That means that any large-scale volatility that occurs after the results of the Fed sit-down cross the wires is likely to come from an indication that the unwinding of QE may be closer on the horizon than current expectations are accounting for. In this context, broadly unchanged Fed commentary may be seen as comparatively hawkish considering investors seem primed for a noticeable lurch toward the accommodative side of the spectrum.

The absence of a discernible dovish tone shift may thus weigh on risky assets and boost the greenback. Such a scenario seems reasonable. Recalling the ultimately unfounded fears of the fiscal drag from the payroll tax hike and “sequester” spending cuts on the US recovery earlier this year, the chance that worries about the shutdown’s impact are overstated is a real one. Furthermore, the Fed’s recently spotty record of managing expectations means officials will probably want to see more hard evidence before tinkering with existing guidance.

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Asia Session:

GMT

CCY

EVENT

ACT

EXP

PREV

23:50

JPY

Industrial Production (YoY) (SEP P)

5.4%

5.5%

-0.4%

23:50

JPY

Industrial Production (MoM) (SEP P)

1.5%

1.8%

-0.9%

0:00

AUD

HIA New Home Sales (MoM) (SEP)

6.4%

-

3.4%

4:00

JPY

Vehicle Production (YoY) (SEP)

13.0%

-

-7.6%

Euro Session:

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

7:00

CHF

UBS Consumption Indicator (SEP)

-

1.32

Low

8:00

EUR

Spanish GDP (YoY) (3Q)

-1.2%

-1.6%

Medium

8:00

EUR

Spanish GDP (QoQ) (3Q)

0.1%

-0.1%

Medium

8:00

CHF

KOF Swiss Leading Indicator (OCT)

1.6

1.53

Medium

8:55

EUR

German Unemployment Change (OCT)

0K

25K

High

8:55

EUR

German Unemployment Rate s.a. (OCT)

6.9%

6.9%

High

9:30

GBP

Lloyds Business Barometer

-

57

Low

10:00

EUR

Euro-Zone Economic Confidence (OCT)

97.2

96.9

Low

10:00

EUR

Euro-Zone Industrial Confidence (OCT)

-6.5

-6.7

Low

10:00

EUR

Euro-Zone Consumer Confidence (OCT F)

-14.5

-14.5

Medium

10:00

EUR

Euro-Zone Business Climate Indicator (OCT)

-0.18

-0.2

Low

10:00

EUR

Euro-Zone Services Confidence (OCT)

-2.8

-3.3

Low

13:00

EUR

German CPI (YoY) (OCT P)

1.4%

1.4%

High

13:00

EUR

German CPI (MoM) (OCT P)

0.0%

0.0%

High

13:00

EUR

German CPI - EU Harmonised (MoM) (OCT P)

0.0%

0.0%

Low

13:00

EUR

German CPI - EU Harmonised (YoY) (OCT P)

1.5%

1.6%

Low

Critical Levels:

CCY

SUPP 3

SUPP 2

SUPP 1

Pivot Point

RES 1

RES 2

RES 3

EURUSD

1.3613

1.3689

1.3717

1.3765

1.3793

1.3841

1.3917

GBPUSD

1.5830

1.5951

1.5999

1.6072

1.6120

1.6193

1.6314

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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30 October 2013 07:42 GMT