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Dollar in focus ahead of Fed meeting

The main theme in the markets was a squeeze higher in the US dollar ahead of the FOMC meeting.

All trading involves risk. Losses can exceed deposits.

The first day of the meeting is underway and perhaps some traders are covering themselves against the slight chance the Fed will not shift away from its intentions to start tapering by the end of the year. There was accelerated greenback buying and not even disappointing consumer confidence, retail sales and PPI data was enough to deter the USD buyers. The real risk to USD shorts is if the Fed comes out and says tapering could still begin by the end of the year. This meeting will give the first real insight into the Fed’s opinion on the recent fiscal dramas in the US.

The US dollar index finally came off 79 and climbed to 79.67 after showing signs of indecision for a few days now. The other side of the coin is if the Fed say tapering will not start by the end of this year, in which case the market is already positioned for this and therefore could still result in selling of risk. Whichever way you look at it, the USD sell-off seems a bit overdone at the moment. As a result, I feel being long on the USD might be the way to go in this environment.

USD/JPY breaks out of its range

USD/JPY was the biggest beneficiary of strength in the greenback and squeezed all the way up to ¥98.28 in a key week for the pair. Yesterday I highlighted the tight range the pair was stuck in and it really needed a catalyst to see it trade out of that range. The pair remains fairly elevated in Asia as the USD continues to gain traction ahead of the Fed meeting. This would certainly appease Japan’s officials as they also prepare for their meeting. The BoJ has a lot to contend with but a fairly US dollar positive report from the Fed should be enough to warrant a wait and see approach. The two stage sales tax hike will be a major consideration for the BoJ in the near future and could finally be the catalyst. For tomorrow’s meeting analysts feel the BoJ will leave the 2014 monetary base at ¥270 trillion and rates on hold. However, the central bank is unlikely to rule out further easing.

Plenty of US data to keep an eye on

Before we even get the FOMC statement, we have the ADP non-farm employment change and CPI data to look out for. All these metrics will help shape up expectations ahead of the Fed. This should really set the scene for a reaction to the Fed of which a lot of analysts are now saying will be pretty similar to the previous meeting. Risk currency pairs are facing downside risk as the US dollar comes back to life and they continue to be sold off heading into the meeting. AUD/USD is a prime example at the moment as it continues to unwind in Asia after a big run recently. The pair lost the 0.95 handle and is now testing lows around 0.946. I feel moves in the pair will be mainly dictated by the USD in the near term.

The EUR/USD also experienced some interesting moves, with plenty of volatility on the back of comments by the ECB’s Nowotny. My colleague Chris Weston has covered the euro and its crosses in his ‘one to watch’ piece this week.

AUD under pressure in Asia

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