Major currency pairs were trapped within very narrow ranges on Wednesday as markets awaited the outcome of the crucial Federal Reserve meeting being held in Washington DC.
The Nikkei index had a solid tone during Asian trading with an advance of close to 2% which provided some dollar support as it attempted to extend gains against the yen. Most Asian bourses registered a more subdued tone which held back the US currency as USD/JPY stalled close to the 95.50 area and it drifted back towards 95 with a reluctance to commit additional funds.
Risk appetite was curbed by increased unease surrounding the Chinese outlook with stresses in local money-markets increasing fears over an impending credit crunch and sharp slowdown in the underlying growth rate. These concerns helped support the yen and also maintained expectations of a potential net flow of funds back into the dollar as the expense of riskier currencies.
EUR/USD again held firm as it traded close to four-month highs around 1.34. A notable feature was again the Euro’s resilience after recent gains and the lack of any significant correction, although the lack of trading volumes was also a key factor. Market reaction following the Federal Reserve statement and Bernanke’s press conference will be an extremely important test of both the Euro’s underlying strength and the fundamental dollar outlook.
The latest Bank of England minutes for the June meeting again recorded a 9-0 vote to leave interest rates on hold at 0.50% while there was a 6-3 vote to leave the amount of quantitative easing unchanged at £375bn. This was the fourth consecutive month that out-going Governor King sided with the minority and voted for additional quantitative easing.
Even those who voted for no additional bond purchases took a slightly more dovish tone. Given the recent tone of commentary from officials and improvement in key business surveys, markets were expecting a slightly more upbeat assessment in the minutes and the relatively defensive tone triggered Sterling selling. In response, GBP/USD dipped to test support near 1.56 while EUR/GBP re-tested the 0.8580 area. There was no major follow-through pressure and GBP/USD moved back to the 1.5650 area as the Fed vigil continued during the New York session.