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European Session: All Eyes on the FOMC

The USD has been slowly falling in the Asian session as risk appetite increases and equities rally. EURUSD traded higher to 1.4770 from 1.4660 while USDJPY climbed to 90.90 from 90.20. Risk correlated trades generally received a boost from Berkshire Hathaway agreeing to buy railroad Burlington Northern Santa Fe Corp and News Tuesday that the Reserve Bank of India bought 200 metric tons of gold from the IMF for $6.7bn . These events caused Wall Street to close slightly higher and gold to surge to $1084. Today in Australia, retail sales data surprised to the downside -0.2% vs. 0.5% exp. This data should provide a warning sign to AUD bulls, supporting the theory that the RBA will continue to move cautiously with its tightening, and slightly lowers the probability of a December rate hike (however there is lots of data between now & then). The clear highlight of the day will be tonight’s FOMC rate decision. It’s universally expected that the Fed will hold rates at their already ultra-low level tonight, so traders will be scrutinizing the language in the accompanying statement. Markets expect the FOMC to upgrade its assessment of the economy in response to recent strong economic data. In particular, we look for the Fed to adjust the phrase “although economic activity is likely to remain weak for a time” to a subtly more optimist outlook. Most importantly we expect the FOMC to preserve its statement that it expects economic conditions “to warrant exceptionally low levels of the federal funds rate for an extended period.” Even the slightest cosmetic changes, towards the hawkish end of the spectrum, will spark participants running for the safe-haven exits. In addition, the statement will also likely be adapted to officially inform that the FOMC’s Treasury purchase program has ended. Just before the FOMC will be the always entertaining ADP employment report. NFP on Friday will be huge for the direction of financial markets; therefore today’s ADP employment report should provide a plausible indication of the change in private payrolls given its track record this year.

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