Yesterday saw a volatile day across currencies as markets digested incoming news from the EU, and geared up for the results of the US FOMC meeting later today. The euro spiked higher on growing speculation that European leaders could take further measures to reduce sovereign debt concerns at an EU Summit later in the week. The Dollar, meanwhile, appears to be enduring a brief bout of weakness, and is back near to its range lows against a basket of currencies. The Chinese decision to maintain interest rates at present levels appears to have calmed fears that the Chinese economy is overheating (rather than raised concerns that the authorities are doing nothing to stop it). This renewed risk appetite has seen the Dollar slip back, a move exaggerated by an announcement yesterday by credit ratings agency Moody’s that the latest US tax package increased the likelihood of a negative outlook on the US AAA rating in the next two years.
With tonight’s Fed meeting in mind, following a soft payrolls report for November, the market will be looking for signals from the Fed that the current increase in asset purchases could be stepped up should it be required. Having increased Quantitative Easing last month, there is no reason for the central bank to make any new announcements, but investors have become accustomed to combing the FOMC statement for insight into the Federal Reserve’s thinking. Central bank monetary policy announcements have the potential to cause turbulence in the currency markets, however this one may pass quietly. The US economy has not improved or deteriorated enough to warrant any major change to the Fed’s outlook.
On the economic calendar today, UK CPI inflation is looked to remain around the 3.2% mark in November, with higher petrol prices over the month keeping the figure elevated. The ZEW survey is expected to show another small rise in German economic confidence in wake of upward revisions to 2010 GDP. Retail sales in the US this afternoon are expected to rise around 0.6% on the headline and ex-autos measures in November, continuing the run of solid releases of late.