USD weakens ahead of FOMC statement

Leading up to this evening’s eagerly anticipated FOMC statement, traders took the opportunity to close some USD positions on Tuesday afternoon. Investors are showing some concerns ahead of the FOMC statement that the Federal Reserve will delay raising US interest rates until much later this year than they originally hoped for, although any optimism that the Federal Reserve will hike rates as early as March/April was always wishful thinking to be honest. In regards to the statement, we can expect it to be highlighted that low inflation levels remain a primary concern for the FOMC, and for this to be something it will be monitoring over the coming months. The FOMC are also likely to continue emphasizing that while consistent progress is being noticed in employment reports, more of the same is going to be required over the coming months.

Overall, what investors will really be interested in finding out is the most updated likely time frame for the first US interest rate hike. Any indications that the Federal Reserve are becoming hesitant towards raising rates due to fears over the global economic recovery are likely to encourage some further USD softness and install increased demand for safe-havens like Gold. On the other hand, a repeat of last month’s message where the Federal Reserve stressed it had no concerns over fears such as the unexpected decline in the price of oil and continued to have commitment to raising US rates this year will probably result in this USD weakness being temporary.

Recent economic data from the United States has led to anxiety that domestic momentum is slowing down, with this anxiety further extending when Durable Goods in December were confirmed as decreasing by far more than forecast at 3.4%. While a noticeable decline in both Durable Goods and recent Retail Sales does lead to some validity behind these concerns that domestic growth is slowing down, it is important to remember that after the previous quarter’s GDP growth was confirmed at an annualised 5%, this was always likely to be the case. For now, the Federal Reserve are likely to brush aside some of the recent data with concerns only likely to be shown if this trend continues throughout February.

With EURUSD gains limited to USD weakness, the Euro bulls really seized the opportunity to exploit the USD weakness noticed yesterday afternoon. After hitting another 11-year low at 1.1097 on Monday morning, the pair advanced has advanced as high as 1.1422. Although one of the main catalysts behind the bullish drive has been USD softness, indications that the Syriza party in Greece are willing renegotiate Greece’s bailout and reduce austerity reforms is resulting in a vote of confidence from some investors. Economic data in Europe is low in volume today, therefore any downside risks for the EURUSD would likely rest upon any sudden political instability in the Eurozone, or increased demand for the USD following the FOMC statement this evening.

The GBPUSD also surprisingly moved to the upside yesterday afternoon, with the pair transitioning from falling to 1.5092 following the UK GDP data coming in below expectations to moving to 1.5226 as the USD weakened. This pair has just benefitted from USD weakness to be honest, with a clean break needed above 1.5225 required to inspire a more bullish view for the pair. It might also be possible that the pair is entering some sort of correction stage after a month of unexpected heavy selling. Nonetheless, for the GBPUSD to continue making upside moves it is going to require further USD weakness.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

Follow Jameel on Twitter @Jameel_FXTM

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