Currency Briefing: Final speculation over Fed “tapering”

on Sep 16, 2013
Listen, Monday, September 16th: The dollar weakened during the week against its major peers after disappointing data on Friday on U.S. retail sales and Michigan consumer sentiment raised further doubts over whether the Federal Reserve will start to scale back its extraordinary support policies for assets. U.S. retail sales rose 0.2 per cent in August, below economists’ expectations of a 0.4 per cent increase, while the Michigan index of consumer confidence in the Midwest dropped to the lowest since April.

The greenback also faded amid renewed uncertainty over whether the Fed will start to unwind its $85 billion of monthly asset purchases at its policy meeting scheduled for September 17-18. Fed Chairman Ben Bernanke has proclaimed that the decision to begin tapering will depend on whether economic data is strong and sustainable enough.
Another question for the markets will be the choice of the central banker that will replace Mr. Bernanke in January 2014 when his second term ends. Some analysts believe this choice to be of even greater significance than his tapering business with one of the primary candidates, Mr. Larry Summers regarded as more hawkish and willing to withdraw monetary stimulus at a faster pace.

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According to Michael Woolfolk, global markets strategist at BNY Mellon, next week`s economic calendar will be overshadowed by the FOMC decision on September 18. “We feel that the “taper” is really Ben Bernanke`s decision, and FOMC will grant him this latitude out of respect for his service at the Fed. If our view is borne out, this could lead to a drop in both the dollar and Treasury yields.”

**Markets in Japan are to remain closed on Monday for a national holiday.**
The euro area is to release data on consumer inflation (10:00 BST), which accounts for a majority of overall inflation. The consumer price index in the 17-nation euro zone remained at 1.6 per cent in July on a year-over-year basis, whereas the data for August will probably be lower, with economists` polls showing the figure of 1.3 per cent.

**The U.S. is to publish the NY Empire state manufacturing index (13:30 BST), in addition to data on industrial production and the capacity utilization (14:15 BST).**
The Empire state manufacturing survey conducted by the Federal Reserve bank of NY showed manufacturing in the NY region increased at a slightly slower pace last month than in the prior one. The index is expected to head towards 9.10 today, or modestly higher than the 8.24 recorded in August.

The index usually has a medium impact on markets.
Industrial production and capacity utilization for August are expected to have slightly improved. All these data releases over the last few sessions before the Fed policy meeting can be expected to be picked over and to give rise to speculation over whether the Fed will start to reduce its monthly assets purchases. However, the speculation is losing strength as the Fed meeting approaches.
On the geo-political scene, Russia and the U.S. agreed on Saturday to follow a “tightly fixed schedule” that envisages international monitors taking control of Syria’s chemical weapons until they can be destroyed or removed from the country by mid-2014. According to political analysts, this timetable will be difficult to meet even if Bashar al-Assad`s regime agrees to cooperate fully. If Assad fails to comply with this framework, U.S. President will again confront the issue of whether to use military force against Syria.


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