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Both the eurozone and US equity markets have been wobbling ahead of Wednesday evening’s statement from the Federal Reserve and the FOMC minutes. These are likely either to give further weight to or disprove the markets’ expectations that we will see the Fed reduce its monthly quantitative easing by $10 billion, down to $75 billion, in September. This cloud has been hanging over the market for months now, and it does feel as though the Fed’s strategy of talking about it early and frequently is hopefully the prelude to a more calculated response when it finally does start tapering.
Although we are in the middle of the summer months, with trading floors relatively empty, this speculation has generated a certain amount of volatility in EUR/USD. Fresh from last week’s focus on the euro, and confirmation that the eurozone had finally managed to extract itself from recession, the emphasis has shifted to the changing dynamics of the US dollar. The last two days, which have been devoid of economic data to give the markets a sense of direction, are about to end, and traders should be prepared for higher levels of volatility.