Dollar strengthens as traders batten the hatches before Fed meeting

This week's FOMC policy decision has the potential to substantially move the market, and there are signs of defensive trading ahead of this key meeting and the important employment report at the end of the week.

The consensus of opinion appears to be that September is the meeting in which the Fed will begin to taper its monthly asset purchases. For that to happen, I think we would be looking for an explicit indication from the committee that September is the crunch month. The worry is that we could see a volatile reaction from the financial markets to any significant development in the stimulus story.

After Mr Bernanke’s remarks at his press conference following the last FOMC meeting, in which he suggested that later this year was the most likely time-frame for tapering, should the economy behave as the Fed forecasts, volatility ramped up in the financial markets. Judging by Mr Bernanke’s subsequent efforts to reassure with his dovish commitment to accommodative policy for the foreseeable future, the committee is wary about spooking the market again. I therefore think that should they hint at September, they will attempt to offset the impact by being even more firmly dovish in their forward guidance.

Of course, nothing is written in stone: the FOMC has been at pains to stress that any decision will be based on incoming economic data. We have seen improvements in the manufacturing sector of late that suggest it may be an area of strength for the economy going forward, but today’s drop in the pending home sales index could be a warning that housing, such a driving force for the economy over the last year or so, could be beginning to ail on account of rising mortgages.

Because of the potential for volatility, we are seeing a decline in risk demand today, supporting the yen and the dollar. By mid-afternoon in New York, EUR/USD was trading down 0.1%, while EUR/JPY was down 0.48%.

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CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.