The dollar weakened after the Fed announcement

It’s becoming more obvious who the next Fed Chief will be, with former Treasury Secretary Larry Summers withdrawing from the race.

The dollar weakened after the announcement as Dr Janet Yellen is seen as more QE friendly. It is clear that fear of further volatility in the market might be contained as tapering is taken into consideration, and with one less uncertainty regarding Bernanke’s successor. The US dollar lost against most of its peers last week as we head into the “tapering light” discussion. US data was largely underwhelming, a reminder that investors should not get ahead of themselves in expecting the US economic recovery.

As we head into this week’s big event, it would seem intuitive that any tapering action will be positive for the dollar in a broad sense. The impact on the dollar will be the statement of the FOMC’s view on the US economy, when they decide to start tapering and to what extent this month, and what we should expect going forward.

Interestingly, survey findings of whether the Fed will start tapering or not this month appear to be split, with the Bloomberg Global poll showing 38% voting for this month and 35% delaying the move to later this year. We have a few data points ahead of the FOMC, such as industrial production, CPI and housing which would provide further colour to how the US economy is faring, given the slowdown expected in August.

The euro

The euro closed 0.3% higher against the dollar last week. It is the best performing currency in the G10 this year, up against the dollar by 0.77%. The general election in Germany will be the focus in the eurozone with German Chancellor Angela Merkel seeking re-election on 22 September. The election appears to be a shoo-in, with support for Merkel’s Christian Democratic Union and sister party at 39 to 41% despite her opponent’s criticisms of the spending cuts she adopted in her fight against the European debt crisis.

Germany continues to be the bright spot leading the region out of recession. The region, however, continues to struggle. Technically, after the euro failed to breach 1.34, it appears to be range bound. Signs of further stabilisation and improvements in key data releases this week would buoy the euro.

Japan

The mood is positive regarding Japan’s path out of deflation, as the Cabinet Office revised estimates of Q2 GDP to 3.8% from the initial 2.6% against the previous quarter. The government said deflation is ending. Japan’s officials are looking at ways to counter the effect of increasing sales tax, considering reducing corporate taxes to offset the sales tax.

Reducing income tax is a lower priority option, according to Economic Minister Akira Amari. Prime Minister Abe will decide on 1 October whether to increase sales tax from 5% to 8%. The dollar yen has failed to cross the 100 resistance point, although a bullish channel has formed.

We see a key support at 99 for this channel and momentum is needed for the bullish channel to continue.

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