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The Fed's Likely Message This Week

The Fed's Likely Message This Week

Kathy Lien, Technical Strategist

Look for the Fed to stay its course regarding its plans for tapering asset purchases while at the same time emphasizing the continuation of “extremely accommodative” monetary policies.

The price action in the FX market today is very similar to what we saw at the beginning of last week: The US dollar (USD) is trading strongly against high-beta currencies such as the British pound (GBP) and all three commodity dollars (AUD, NZD, and CAD), but is weaker against the euro (EUR) and Swiss franc (CHF). The only outlier is USDJPY, which extended gains into the North American session.

While equity futures are basically unchanged, the fact that US ten-year Treasury yields are closing in on 2.2% indicates that we have a segmented market right now, as well as renewed deleveraging in the commodity dollars.

It is clear that there is more confusion than clarity regarding the Federal Reserve’s intentions because the latest market swings were triggered by articles from Fed watchers speculating about what Fed Chairman Ben Bernanke will say on Wednesday.

See also: For Fed, There’s More Confusion Than Clarity

Last week, Wall Street Journal columnist Jon Hilsenrath predicted that the Fed will make a point to downplay expectations and distinguish the difference between tapering and tightening. This week, the Financial Times wrote that Bernanke will signal that the Fed is close to tapering. We are amazed that the markets were surprised by these articles because they don't say anything new.

Since the last Fed meeting, a number of policymakers have indicated the central bank could taper asset purchases in a few months, and some of the same officials have also said that monetary policy will remain extremely accommodative. We believe this is the same message that will be conveyed at tomorrow’s much-anticipated meeting of the Federal Open Market Committee (FOMC).

See related: The Key FX Event for This Week

This morning's US economic data was not much help, however. Consumer prices rose 0.1%, and excluding food and energy, prices rose 0.2% in May. Housing starts rebounded 6.8% after dropping 14.8% the previous month, while building permits dropped 3.1% after rising 12.9% the month prior. For the most part, inflationary pressures remain muted and the housing market continues to recover.

Today’s Best (and Worst) Performers

Meanwhile, the euro is performing well this morning thanks to the rise in Eurozone and German investor sentiment. The ZEW survey rose to 30.6 from 27.6, and while investors grew less optimistic about current conditions in Germany, their confidence in future conditions improved.

With the European Central Bank (ECB) taking additional steps to stimulate the economy, investors are looking for a stronger recovery.

The strength in the euro contrasts with the weakness seen in the British pound and Aussie. UK consumer prices increased more than expected, but the GBP was driven lower by EURGBP buying.

The AUD is today’s worst performer so far, down almost 1% against the USD after the Reserve Bank of Australia (RBA) minutes reminded everyone that the central bank is looking to ease again, and their views have not changed because the currency weakened. In fact, the exchange rate could depreciate further over time considering the terms of trade declined, which is not favorable for Australia's economy.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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