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Subdued FX Price Action Shifts Focus – 11 Fed Speeches Next Week

Christopher Vecchio

Talking Points:

- German parliamentary election on Sunday unlikely to be EUR-negative.

- Attention in US turns to seemingly hopeless fiscal debate.

- FOMC surprise could be rebuked amid 11 speeches by Fed members next week.

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.55% (+0.01%prior 5-days)


As the week comes to a close, volatility in FX markets has cooled dramatically as investors recalibrate to the non-tapered world. While the Federal Reserve’s rate decision on Wednesday certainly shocked investors, the fact of the matter is that the Fed did very little – no change in the overnight interest rate and no change in the pace of QE3.

What the Fed did do, however, is adjust its US growth, inflation, and labor market forecasts for 2013 and 2014, which once again showed that policymakers overestimated the strength of the US economy. This in and of itself is a dovish policy move: by reducing growth assessments, it is implied that accommodative policy will be needed longer than previously anticipated.

While the US Dollar weakened immediately on the news, in particular against the beleaguered emerging market currencies (generally anything high beta/high yielding surged), scope for further losses – or gains – is hazy in the near-term given the calendar ahead. Next week, there are 11 speeches by Fed policymakers and in light of the fact that general commentary is that the Fed lost credibility by not tapering, it will be particularly interesting to gauge market reactions around these commentaries.

If the US Dollar is sensitive to these collective remarks, it will be a sign that credibility is not lost among Fed members; but if no attention is paid, it will be a clear sign that incoming economic data now trumps rhetoric, adding another layer of importance to the September NFP release on October 4.

Elsewhere, the Euro is trading slightly lower ahead of the German parliamentary elections this weekend, though the chance for weakness ensuing is low. Polls show that current Chancellor Angela Merkel’s CDU party holds a 10-point cushion over the top challenger SPD. While plurality is unlikely, a grand coalition could arise from the elections that will keep Merkel in power; the Euro could see a brief rally on the news.

EURUSD 5-minute Chart: September 20, 2013 Intraday

Subdued_FX_Price_Action_Shifts_Focus_11_Fed_Speeches_Next_Week_body_Picture_1.png, Subdued FX Price Action Shifts Focus – 11 Fed Speeches Next Week

Taking a look at European credit, subdued price action in credit has helped keep the Euro steady on Friday as investors wait for the German election. The Italian 2-year note yield has increased to 1.814% (+1.8-bps) while the Spanish 2-year note yield has increased to 1.570% (+1.1-bps). Similarly, the Italian 10-year note yield has increased to 4.303% (+1.9-bps) while the Spanish 10-year note yield has increased to 4.336% (+2.8-bps); higher yields imply lower prices.

Read more: Making Sense of the Fed’s Non-Taper – We Should Have Seen it Coming


Subdued_FX_Price_Action_Shifts_Focus_11_Fed_Speeches_Next_Week_body_x0000_i1028.png, Subdued FX Price Action Shifts Focus – 11 Fed Speeches Next Week

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--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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