Caution was inevitably the dominant influence on Wednesday ahead of the Federal Reserve statement and press conference from Chairman Bernanke. The market consensus was that there would be a limited tapering of bond purchases, potentially to US$75bn from US$85bn at present. There was little confidence in either the outcome or the potential market reaction to the various possible decisions with forward guidance and trends in yields likely to have a key impact.
EUR/USD was trapped in very narrow ranges of less than 30 pips with no test of any significant technical levels during the European session as it consolidated around 1.3350. USD/CHF was also unable to make any headway during the session and held just above 0.9250.
Risk conditions were broadly neutral given uncertainty surrounding the Fed and the potential impact on key emerging markets. The dollar was unable to make any impression on the yen and USD/JPY dipped to test support below 99.0 ahead of the US open.
The US housing data was slightly weaker than expected with starts rising only slightly to an annualised rate of 0.89mn for August from 0.88mn while there was a decline in permits to 0.92mn from 0.95mn. The data maintained some speculation that the housing sector overall was slowing which could have some impact on Fed policy.
There were no surprises on the vote counts in the Bank of England MPPC minutes with 9-0 backing to leave interest rates on hold at 0.50% and the amount of quantitative easing at £375bn. The bank was slightly more optimistic surrounding the growth outlook with expectations of 0.7% third-quarter expansion from 0.5% previously. According to the minutes, the evidence suggested that the recovery was at least as strong as expected when the August inflation report was released. In this environment, no members judged that further stimulus was appropriate at present.
The generally upbeat economic assessment again helped underpin Sterling as gilt yields moved significantly higher to test resistance above the 3.00% level. There was also a further squeeze on short retail positions with the move triggering another round of stop-loss buying. GBP/USD moved to fresh 8-month highs above 1.5950 while EUR/GBP tested support near 0.8360.