Market waiting for FOMC and pricing in a quiet week ahead

on Sep 10, 2013
Listen, Tuesday, September 10: Better-than-expected macro data from the U.S. overshadowed Syrian uncertainty and gave rise to a classical risk-on pattern last week. But what happened on the first day of an apparently quiet week?

EUR/USD topped out in the 1.3185/90 area in early Europe yesterday, where the market also peaked on Friday, although it was still trading comfortably above the early Asian low at 1.3157.
Looking at the graphs, the top of the Ichimoku cloud came in at 1.3153 and offered good support intraday. Below there, the 1.3104 level looks increasingly significant. This marks the 50% retracement of the July-August rally from 1.2755 to 1.3453 where it held perfectly on Friday. Later in the day EUR/USD perked back above the 1.3200 figure, with little explanation other than the uncertainty over Federal Reserve plans and the potential for U.S. attacks on Syria.

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The press-conference held by the U.S. Secretary of State John Kerry early on Monday was not able to influence a market that stood stuck in a narrow range. Later in the day however, Treasury prices gained as investors revived their evaluation how a weaker-than-expected labor market report would impact the Fed`s plans for tapering of its bond-buying stimulus program. Analysts explained the gains for Treasury prices as being a follow-through from Friday.

The labor market report on Friday could be a good example of how the good news could be bad news for the Federal Reserve as it considers when to begin tapering its monetary stimulus. While the unemployment rate dropped last month to 7.3 per cent, the lowest since December 2008, the decline occurred because of contraction in the workforce, not because more people got jobs. This is negative for the economy as the participation rate, i.e. the number of working-age people either holding a job or looking for one, stands at a 35-year low. This translates into more and more discouraged job-seekers giving up their search. A key question now is how much of the decline in the participation rate is structural and long-lasting, including amongst the ageing population, and how much is cyclical and temporary.

The data on Friday fueled sentiment that the Federal Reserve may hold off on announcing plans to start scaling back its $85 billion in monthly bond purchases at its Sep 17-18 policy meeting. Remember the stimulus program weakens the greenback to spur recovery by driving down long-term interest rates, and talk of the Federal Reserve keeping its asset-purchasing program in place for longer than once expected can reduce U.S. dollar demand and send investors chasing higher-yielding currencies and asset classes.

On the geopolitical scene on Monday, Russian Foreign Minister Lavrov backed a demand by U.S. Secretary of State that Syria put any chemical weapons it possesses under international control and then abolish them, a rare sign of apparent agreement between Moscow and Washington. Additionally, late on Monday came Syria`s consent for international control over its weapons. Even if this development could be perceived as a route towards a diplomatic solution and attempts from all sides to avoid a military attack on the territory of Syria, markets became nervous with yields on U.S. debt rising and global equities falling. EUR/USD pushed higher reaching 1.3280 during the N.Y. session.
According to observers most market makers are not putting much weight on the German elections in 2 weeks’ time, therefore trading will remain dominated by the central themes of Syria and Fed tapering.
Not much in the way of important economic data on Tuesday apart from news coming from China (Industrial productions and Retail Sales in August), Italy GDP Q2 2013 (09:00 BST) and Canada Housing Starts in August (13:15 BST).


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